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

16 Pages Posted: 4 May 2003 Last revised: 29 Nov 2022

See all articles by Francis X. Diebold

Francis X. Diebold

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Michael W. Brandt

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

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.

Suggested Citation

Diebold, Francis X. and Brandt, Michael W., A No-Arbitrage Approach to Range-Based Estimation of Return Covariances and Correlations (May 2003). NBER Working Paper No. w9664, Available at SSRN: https://ssrn.com/abstract=403560

Francis X. Diebold

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
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HOME PAGE: http://www.ssc.upenn.edu/~fdiebold/

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Michael W. Brandt (Contact Author)

Duke University - Fuqua School of Business ( email )

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National Bureau of Economic Research (NBER)

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United States

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