A Closed-Formula Characterization of the Epps Effect

46 Pages Posted: 20 Oct 2018 Last revised: 23 Oct 2018

See all articles by Giuseppe Buccheri

Giuseppe Buccheri

University of Verona - Department of Economics

Giulia Livieri

Scuola Normale Superiore

Davide Pirino

Department of Economics and Finance, University of Rome "Tor Vergata"

Alessandro Pollastri

Scuola Normale Superiore

Date Written: October 22, 2018

Abstract

In this study we provide an analytical characterization of the impact of zero returns on the popular realized covariance estimator of Barndorff-Nielsen and Shephard (2004). In our framework, efficient price processes evolve as a semimartingale with some likelihood of repeated prices. We show that the standard realized covariance estimator is asymptotically affected by a downward bias, and the size of the bias depends on these likelihoods. We demonstrate that this result can be used to construct a consistent estimator of the integrated covariance of a vector semimartingale. The advantages with respect to other estimators are discussed in data.

Keywords: Epps Effect, Realized Covariance, Fill Asymptotic, Liquidity

JEL Classification: G10, C12

Suggested Citation

Buccheri, Giuseppe and Livieri, Giulia and Pirino, Davide and Pollastri, Alessandro, A Closed-Formula Characterization of the Epps Effect (October 22, 2018). Available at SSRN: https://ssrn.com/abstract=3255070 or http://dx.doi.org/10.2139/ssrn.3255070

Giuseppe Buccheri (Contact Author)

University of Verona - Department of Economics ( email )

Via Cantarane, 24
37129 Verona
Italy
045 8028525 (Phone)

Giulia Livieri

Scuola Normale Superiore ( email )

Piazza dei Cavalieri, 7
Pisa, 56126
Italy

Davide Pirino

Department of Economics and Finance, University of Rome "Tor Vergata" ( email )

Via Columbia 2
Rome, Lazio 00133
Italy

Alessandro Pollastri

Scuola Normale Superiore ( email )

Piazza dei Cavalieri, 7
Pisa, 56126
Italy

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