A Score-Driven Conditional Correlation Model for Noisy and Asynchronous Data: An Application to High-Frequency Covariance Dynamics
30 Pages Posted: 8 Feb 2017 Last revised: 24 Mar 2019
Date Written: March 1, 2019
The analysis of the intraday dynamics of correlations among high-frequency returns is challenging due to the presence of asynchronous trading and market microstructure noise. Both effects may lead to significant data reduction and may severely underestimate correlations if traditional methods for low-frequency data are employed. We propose to model intraday log-prices through a multivariate local-level model with score-driven covariance matrices and to treat asynchronicity as a missing value problem. The main advantages of this approach are: (i) all available data are used when filtering correlations, (ii) market microstructure noise is taken into account, (iii) estimation is performed through standard maximum likelihood methods. Our empirical analysis, performed on 1-second NYSE data, shows that opening hours are dominated by idiosyncratic risk and that a market factor progressively emerges in the second part of the day. The method can be used as a nowcasting tool for high-frequency data, allowing to study the real-time response of covariances to macro-news announcements and to build intraday portfolios with very short optimization horizons.
Keywords: Intraday Correlations; Dynamic Dependencies; Asynchronicity; Microstructure Noise
JEL Classification: C58; D53; D81
Suggested Citation: Suggested Citation