Estimating the Spot Covariation of Asset Prices – Statistical Theory and Empirical Evidence

56 Pages Posted: 9 Oct 2014

See all articles by Markus Bibinger

Markus Bibinger

University of Mannheim

Nikolaus Hautsch

University of Vienna - Department of Statistics and Operations Research; Center for Financial Studies (CFS)

Peter Malec

University of Cambridge - Faculty of Economics

Markus Reiss

Humboldt University of Berlin

Multiple version iconThere are 2 versions of this paper

Date Written: October 2014

Abstract

We propose a new estimator for the spot covariance matrix of a multi-dimensional continuous semi-martingale log asset price process which is subject to noise and non-synchronous observations. The estimator is constructed based on a local average of block-wise parametric spectral covariance estimates. The latter originate from a local method of moments (LMM) which recently has been introduced by Bibinger et al. (2014). We extend the LMM estimator to allow for autocorrelated noise and propose a method to adaptively infer the autocorrelations from the data. We prove the consistency and asymptotic normality of the proposed spot covariance estimator. Based on extensive simulations we provide empirical guidance on the optimal implementation of the estimator and apply it to high-frequency data of a cross-section of NASDAQ blue chip stocks. Employing the estimator to estimate spot covariances, correlations and betas in normal but also extreme-event periods yields novel insights into intraday covariance and correlation dynamics. We show that intraday (co-)variations (i) follow underlying periodicity patterns, (ii) reveal substantial intraday variability associated with (co-)variation risk, (iii) are strongly serially correlated, and (iv) can increase strongly and nearly instantaneously if new information arrives.

Keywords: local method of moments, spot covariance, smoothing, intraday (co-)variation risk

JEL Classification: C58, C14, C32

Suggested Citation

Bibinger, Markus and Hautsch, Nikolaus and Malec, Peter and Reiss, Markus, Estimating the Spot Covariation of Asset Prices – Statistical Theory and Empirical Evidence (October 2014). CFS Working Paper, No. 477. Available at SSRN: https://ssrn.com/abstract=2507714 or http://dx.doi.org/10.2139/ssrn.2507714

Markus Bibinger

University of Mannheim ( email )

Mannheim, 68131
Germany

Nikolaus Hautsch (Contact Author)

University of Vienna - Department of Statistics and Operations Research ( email )

Oskar-Morgenstern-Platz 1
Vienna, A-1090
Austria

Center for Financial Studies (CFS) ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Peter Malec

University of Cambridge - Faculty of Economics ( email )

Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

Markus Reiss

Humboldt University of Berlin ( email )

Berlin, 10099
Germany

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