A Closed-Formula Characterization of the Epps Effect
46 Pages Posted: 20 Oct 2018 Last revised: 23 Oct 2018
Date Written: October 22, 2018
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