Realized Correlation Tick-By-Tick

University of St. Gallen, Department of Economics, Discussion Paper No. 2007-02

32 Pages Posted: 19 Jan 2007

See all articles by Fulvio Corsi

Fulvio Corsi

University of Pisa - Department of Economics; City University London

Francesco Audrino

University of St. Gallen

Date Written: January 2007

Abstract

We propose the Heterogeneous Autoregressive (HAR) model for the estimation andprediction of realized correlations. We construct a realized correlation measure where both the volatilities and the covariances are computed from tick-by-tick data. As for the realized volatility, the presence of market microstructure can induce significant bias in standard realized covariance measure computed with artificially regularly spaced returns. Contrary to these standard approaches we analyse a simple and unbiased realized covariance estimator that does not resort to the construction of a regular grid, but directly and efficiently employs the raw tick-by-tick returns of the two series. Montecarlo simulations calibrated on realistic market microstructure conditions show that this simple tick-by-tick covariance possesses no bias and the smallest dispersion among the covariance estimators considered in the study. In an empirical analysis on S&P 500 and US bond data we find that realized correlations show significant regime changes in reaction to financial crises. Such regimes must be taken into account to get reliable estimates and forecasts.

Keywords: High frequency data, Realized Correlation, Market Microstructure, Bias correction, HAR, Regimes

JEL Classification: C13, C22, C51, C53

Suggested Citation

Corsi, Fulvio and Audrino, Francesco, Realized Correlation Tick-By-Tick (January 2007). University of St. Gallen, Department of Economics, Discussion Paper No. 2007-02. Available at SSRN: https://ssrn.com/abstract=957997 or http://dx.doi.org/10.2139/ssrn.957997

Fulvio Corsi (Contact Author)

University of Pisa - Department of Economics ( email )

via Ridolfi 10
I-56100 Pisa, PI 56100
Italy

HOME PAGE: http://people.unipi.it/fulvio_corsi/

City University London ( email )

Northampton Square
London, EC1V OHB
United Kingdom

Francesco Audrino

University of St. Gallen ( email )

Bodanstrasse 6
St. Gallen, CH-9000
Switzerland

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