A No-Arbitrage Approach to Range-Based Estimation of Return Covariances and Correlations
Francis X. Diebold
University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)
Michael W. Brandt
Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)
NBER Working Paper No. w9664
We extend range-based volatility estimation to the multivariate case. In particular, we propose a range-based covariance estimator motivated by a key financial economic consideration, the absence of arbitrage, in addition to statistical considerations. We show that this estimator is highly efficient yet robust to market microstructure noise arising from bid-ask bounce and asynchronous trading.
Number of Pages in PDF File: 16working papers series
Date posted: May 4, 2003
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