A No-Arbitrage Approach to Range-Based Estimation of Return Covariances and Correlations
16 Pages Posted: 4 May 2003 Last revised: 29 Nov 2022
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A No-Arbitrage Approach to Range-Based Estimation of Return Covariances and Correlations
Date Written: May 2003
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.
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