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

Michael W. Brandt, Francis Diebold and April

Center for Financial Institutions Working Papers from Wharton School Center for Financial Institutions, 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)
New Economics Papers: this item is included in nep-ecm, nep-ifn and nep-rmg
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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 (2003)
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