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High Frequency Covariance Estimates with Noisy and Asynchronous Financial Data

37 Pages Posted: 28 Jun 2010  

Yacine Ait-Sahalia

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Jianqing Fan

Princeton University - Bendheim Center for Finance

Dacheng Xiu

University of Chicago - Booth School of Business

Date Written: June 1, 2010

Abstract

This paper proposes a consistent and efficient estimator of the high frequency covariance (quadratic covariation) of two arbitrary assets, observed asynchronously with market microstructure noise. This estimator is built upon the marriage of the quasi-maximum likelihood estimator of the quadratic variation and the proposed Generalized Synchronization scheme. It is therefore not influenced by the Epps effect. Moreover, the estimation procedure is free of tuning parameters or bandwidths and readily implementable. The Monte Carlo simulations show the advantage of this estimator by comparing it with a variety of estimators with specific synchronization methods. The empirical studies of six foreign exchange future contracts illustrate the time-varying correlations of the currencies during the global financial crisis in 2008, discovering the similarities and differences in their roles as key currencies in the global market.

Keywords: Market microstructure noise, Covariance, Quasi-Maximum Likelihood Estimator, Refresh Time, Generalized Synchronization

JEL Classification: C13, C22

Suggested Citation

Ait-Sahalia, Yacine and Fan, Jianqing and Xiu, Dacheng, High Frequency Covariance Estimates with Noisy and Asynchronous Financial Data (June 1, 2010). Available at SSRN: https://ssrn.com/abstract=1631344 or http://dx.doi.org/10.2139/ssrn.1631344

Yacine Ait-Sahalia

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Princeton University - Department of Economics ( email )

Fisher Hall
Princeton, NJ 08544
United States
609-258-4015 (Phone)
609-258-5398 (Fax)

Jianqing Fan

Princeton University - Bendheim Center for Finance ( email )

26 Prospect Avenue
Princeton, NJ 08540
United States
609-258-7924 (Phone)
609-258-8551 (Fax)

HOME PAGE: http://orfe.princeton.edu/~jqfan/

Dacheng Xiu (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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