A No-Arbitrage Approach to Range-Based Estimation of Return Covariances and Correlations (Second Version)

Diebold, Francis X.; Brandt, Michael W.

doi:10.2139/ssrn.412960

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A No-Arbitrage Approach to Range-Based Estimation of Return Covariances and Correlations (Second Version)

21 Pages Posted: 4 Jun 2003

See all articles by Francis X. Diebold

Francis X. Diebold

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Michael W. Brandt

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Date Written: April 2003

Abstract

We extend range-based volatility estimation to the multivariate case. In particular, we propose a range-based covariance estimator motivated by a key financial economic consideration, the absence of arbitrage, in addition to statistical considerations. We show that this estimator is highly efficient yet robust to market microstructure noise arising from bid-ask bounce and asynchronous trading.

Keywords: Range-based Estimation, Volatility, Covariance, Correlation, Absence of Arbitrage, Exchange Rates, Stock Returns, Bond returns, Bid-ask Bounce, Asynchronous Trading

JEL Classification: C10, G10

Suggested Citation: Suggested Citation

Diebold, Francis X. and Brandt, Michael W., A No-Arbitrage Approach to Range-Based Estimation of Return Covariances and Correlations (Second Version) (April 2003). Available at SSRN: https://ssrn.com/abstract=412960 or http://dx.doi.org/10.2139/ssrn.412960

Francis X. Diebold (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
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Philadelphia, PA 19104-6297
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215-898-1507 (Phone)
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HOME PAGE: http://www.ssc.upenn.edu/~fdiebold/