A Closed-Formula Characterization of the Epps Effect

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: 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