A No-Arbitrage Approach to Range-Based Estimation of Return Covariances and Correlations

Michael Brandt (mbrandt@duke.edu) and Francis Diebold
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Michael Brandt: The Fuqua School of Business, Duke University

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: We extend range-based volatility estimation to the multivariate case. In particular, we propose a range-based covariance estimator motivated by a key financial economic consideration, the absence of arbitrage, in addition to statistical considerations. We show that this estimator is highly efficient yet robust to market microstructure noise arising from bid-ask bounce and asynchronous trading.

Keywords: Range-based estimation; volatility; covariance; correlation; absence of arbitrage; exchange rates; stock returns; bond returns; bid-ask bounce; asynchronous trading (search for similar items in EconPapers)
JEL-codes: C10 G10 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2001-09-01, Revised 2003-04-01
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Citations: View citations in EconPapers (13)

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Related works:
Journal Article: A No-Arbitrage Approach to Range-Based Estimation of Return Covariances and Correlations (2006)
Working Paper: A no-arbitrage approach to range-based estimation of return covariances and correlations (2004)
Working Paper: A No-Arbitrage Approach to Range-Based Estimation of Return Covariances and Correlations (2003)
Working Paper: A No-Arbitrage Approach to Range-Based Estimation of Return Covariances and Correlations
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