A no-arbitrage approach to range-based estimation of return covariances and correlations

Michael W. Brandt and Francis Diebold

No 2004/07, CFS Working Paper Series from Center for Financial Studies (CFS)

Abstract: We extend the important idea of range-based volatility estimation to the multivariate case. In particular, we propose a range-based covariance estimator that is motivated by financial economic considerations (the absence of arbitrage), in addition to statistical considerations. We show that, unlike other univariate and multivariate volatility estimators, the range-based estimator is highly efficient yet robust to market microstructure noise arising from bid-ask bounce and asynchronous trading. Finally, we provide an empirical example illustrating the value of the high-frequency sample path information contained in the range-based estimates in a multivariate GARCH framework.

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)
Date: 2004
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Citations: View citations in EconPapers (5)

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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 (2003)
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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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfswop:200407

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