Realized Covariance Tick-by-Tick in Presence of Rounded Time Stamps and General Microstructure Effects

Fulvio Corsi () and Francesco Audrino

Journal of Financial Econometrics, 2012, vol. 10, issue 4, 591-616

Abstract: This paper presents two classes of tick-by-tick covariance estimators adapted to the case of rounding in the price time stamps to a frequency lower than the typical arrival rate of tick prices. Through Monte Carlo simulations, we investigate the behavior of such estimators under realistic market microstructure conditions analogous to those of the financial data examined in this paper's empirical section, that is, nonsynchronous trading, general ARMA structure for microstructure noise, and true lead--lag cross-covariance. Simulation results show the robustness of the proposed tick-by-tick covariance estimators to time stamp rounding, and their overall performance is superior to competing covariance estimators under empirically realistic microstructure conditions. These results are confirmed in the empirical application where the economic benefits of the proposed estimators are evaluated with volatility timing strategies applied to a bivariate portfolio of S&P 500 futures and 30-year U.S. treasury bond futures. Copyright The Author, 2012. Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

Date: 2012
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