Predicting the Daily Covariance Matrix for S&P 100 Stocks Using Intraday Data - But Which Frequency to Use?

Tinbergen Institute Discussion Paper No. 05-089/4

29 Pages Posted: 2 Nov 2005

See all articles by Michiel De Pooter

Michiel De Pooter

Board of Governors of the Federal Reserve System

Martin Martens

Robeco Asset Management

Dick J. C. van Dijk

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute; ERIM

Date Written: September 21, 2005

Abstract

This paper investigates the merits of high-frequency intraday data when forming minimum variance portfolios and minimum tracking error portfolios with daily rebalancing from the individual constituents of the S&P 100 index. We focus on the issue of determining the optimal sampling frequency, which strikes a balance between variance and bias in covariance matrix estimates due to market microstructure effects such as non-synchronous trading and bid-ask bounce. The optimal sampling frequency typically ranges between 30- and 65-minutes, considerably lower than the popular five-minute frequency. We also examine how bias-correction procedures, based on the addition of leads and lags and on scaling, and a variance-reduction technique, based on subsampling, affect the performance.

Keywords: realized volatility, high-frequency data, volatility timing, mean-variance analysis, tracking error

JEL Classification: G11

Suggested Citation

De Pooter, Michiel and Martens, Martin P.E. and van Dijk, Dick J.C., Predicting the Daily Covariance Matrix for S&P 100 Stocks Using Intraday Data - But Which Frequency to Use? (September 21, 2005). Tinbergen Institute Discussion Paper No. 05-089/4, Available at SSRN: https://ssrn.com/abstract=829545 or http://dx.doi.org/10.2139/ssrn.829545

Michiel De Pooter

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Martin P.E. Martens

Robeco Asset Management ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

Dick J.C. Van Dijk (Contact Author)

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute

P.O. Box 1738
3000 DR Rotterdam
Netherlands

ERIM ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1263 (Phone)
+31 10 4089162 (Fax)

HOME PAGE: http://people.few.eur.nl/djvandijk

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
504
Abstract Views
2,482
rank
62,854
PlumX Metrics