Realized Correlation Tick-by-Tick

Fulvio Corsi () and Francesco Audrino

University of St. Gallen Department of Economics working paper series 2007 from Department of Economics, University of St. Gallen

Abstract: We propose the Heterogeneous Autoregressive (HAR) model for the estimation and prediction 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 (search for similar items in EconPapers)
JEL-codes: C13 C22 C51 C53 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2007-01
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-for, nep-mst and nep-rmg
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Citations: View citations in EconPapers (13)

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