Estimating Covariance via Fourier Method in the Presence of Asynchronous Trading and Microstructure Noise

Maria Elvira Mancino and Simona Sanfelici

Journal of Financial Econometrics, 2011, vol. 9, issue 2, 367-408

Abstract: We analyze the effects of market microstructure noise on the Fourier estimator of multivariate volatilities. We prove that the estimator is consistent in the case of asynchronous data and asymptotically unbiased in the presence of various types of microstructure noise. This result is obtained through an analytical computation of the bias and the mean squared error of the Fourier estimator and confirmed by Monte Carlo experiments. A comparison with several covariance estimators is performed. (JEL: C14, C32, G1) Copyright The Author 2010. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org, Oxford University Press.

Date: 2011
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