Integrated Covariance Estimation Using High-Frequency Data in the Presence of Noise

48 Pages Posted: 17 Jul 2006

See all articles by Valeri Voev

Valeri Voev

Aarhus University - CREATES

Asger Lunde

Aarhus University - School of Business and Social Sciences; CREATES

Multiple version iconThere are 2 versions of this paper

Date Written: February 23, 2006

Abstract

We analyze the effects of non-synchronicity and market microstructure noise on realized covariance type estimators. It is shown that non-synchronicity leads to severe biases, whenever synchronization methods that employ last-tick interpolation are used. We study a simple estimator which resolves that problem and is unbiased and consistent for the integrated covariance in the absence of noise. When noise is present, however, we show that this estimator is biased and suggest a simple bias correction procedure. Furthermore, a subsampling version of the estimator is proposed, which could improve its efficiency. Finally, a simulation experiment is carried out to illustrate the theoretical results.

Keywords: Integrated covariance, Epps effect, Non-synchronous trading, Market Microstructure

JEL Classification: C32, G00, G1

Suggested Citation

Voev, Valeri and Lunde, Asger, Integrated Covariance Estimation Using High-Frequency Data in the Presence of Noise (February 23, 2006). Available at SSRN: https://ssrn.com/abstract=917087 or http://dx.doi.org/10.2139/ssrn.917087

Valeri Voev (Contact Author)

Aarhus University - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Asger Lunde

Aarhus University - School of Business and Social Sciences ( email )

Aarhus
Denmark

CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

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