A No-Arbitrage Approach to Range-Based Estimation of Return Covariances and Correlations (Second Version)
21 Pages Posted: 4 Jun 2003
Date Written: April 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.
Keywords: Range-based Estimation, Volatility, Covariance, Correlation, Absence of Arbitrage, Exchange Rates, Stock Returns, Bond returns, Bid-ask Bounce, Asynchronous Trading
JEL Classification: C10, G10
Suggested Citation: Suggested Citation
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