A Least Squares Regression Realized Covariation Estimation

87 Pages Posted: 23 Jan 2013 Last revised: 3 Oct 2019

See all articles by Ingmar Nolte

Ingmar Nolte

Lancaster University - Department of Accounting and Finance

Michalis Vasios

Norges Bank Investment Management (NBIM)

Valeri Voev

Aarhus University - CREATES

Qi Xu

Zhejiang University - School of Economics and Academy of Financial Research

Date Written: September 28, 2019

Abstract

We propose a least squares regression framework for the estimation of the realized covariation matrix using high frequency data. The new estimator is robust to market microstructure noise (MMS) and non-synchronous trading. Comprehensive simulation and empirical analysis show that our estimator performs as well as a set of popular estimators in the literature. More importantly, our framework allows for the unique identification of MMS noise moments. We find that these noise moments are related to measures of liquidity and contain predictive information that helps to significantly improve out-of-sample asset allocation.

Keywords: Market Microstructure Noise, Realized Volatility, Realized Covariation, High Frequency Data, Subsampling, Market Microstructure, Asset Allocation

JEL Classification: C13, C22, G10

Suggested Citation

Nolte, Ingmar and Vasios, Michalis and Voev, Valeri and Xu, Qi, A Least Squares Regression Realized Covariation Estimation (September 28, 2019). Available at SSRN: https://ssrn.com/abstract=2205033 or http://dx.doi.org/10.2139/ssrn.2205033

Ingmar Nolte (Contact Author)

Lancaster University - Department of Accounting and Finance ( email )

Lancaster, Lancashire LA1 4YX
United Kingdom

Michalis Vasios

Norges Bank Investment Management (NBIM) ( email )

Queensberry House
3 Old Burlington Street
London, W1S 3AE
United Kingdom

Valeri Voev

Aarhus University - CREATES ( email )

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

Qi Xu

Zhejiang University - School of Economics and Academy of Financial Research

Yuquan Campus 38 Zheda Road
Hangzhou, Zhejiang 310027
China

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