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

Scuola Normale Superiore

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)

Scuola Normale Superiore ( email )

Piazza dei Cavalieri, 7
Pisa, 56126
Italy
+39 3341046378 (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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