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Integrated Covariance Estimation Using High-Frequency Data in the Presence of Noise

Posted: 16 Jun 2008  

Valeri Voev

University of Aarhus - CREATES

Asger Lunde

University of Aarhus - School of Economics and Management; CREATES

Multiple version iconThere are 2 versions of this paper

Date Written: Winter 2007

Abstract

We analyze the effects of nonsynchronicity and market microstructure noise on realized covariance type estimators. Hayashi and Yoshida () propose a simple estimator that resolves the problem of nonsynchronicity and is unbiased and consistent for the integrated covariance in the absence of noise. When noise is present, however, we find that this estimator is biased, and show how the bias can be corrected for. Ultimately, we propose a subsampling version of the bias-corrected estimator which improves its efficiency. Empirically, we find that the usual assumption of a martingale price process plus an independently and identically distributed (i.i.d.) noise does not describe the dynamics of the observed price process across stocks, which confirms the practical relevance of our general noise specification and the estimation techniques we propose. Finally, a simulation experiment is carried out to complement the theoretical results.

Keywords: integrated covariance, Epps effect, nonsynchronous trading, market microstructure noise, subsampling

Suggested Citation

Voev, Valeri and Lunde, Asger, Integrated Covariance Estimation Using High-Frequency Data in the Presence of Noise (Winter 2007). Journal of Financial Econometrics, Vol. 5, Issue 1, pp. 68-104, 2007. Available at SSRN: https://ssrn.com/abstract=1145510 or http://dx.doi.org/10.1093/jjfinec/nbl011

Valeri Voev (Contact Author)

University of Aarhus - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Asger Lunde

University of Aarhus - School of Economics and Management ( email )

Aarhus
Denmark

CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

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