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Estimating the quadratic covariation matrix for asynchronously observed high frequency stock returns corrupted by additive measurement error

Park, Sujin; Hong, Seok Young; Linton, Oliver

Authors

Sujin Park

Seok Young Hong

Oliver Linton



Abstract

This paper studies the estimation problem of the covariance matrices of asset returns in the presence of microstructure noise and asynchronicity between the observations across different assets. Motivated by Malliavin and Mancino (2002, 2009) we propose a new Fourier domain based estimator of multivariate ex-post volatility, which we call the Fourier Realized Kernel (FRK). An advantage of this approach is that no explicit time alignment is required unlike the time domain based methods widely adopted in the existing literature. We derive the large sample properties and establish asymptotic normality of our estimator under some general conditions that allow for both temporal and cross-sectional correlations in the measurement error process. Our results can be viewed as Frequency domain extension of the asymptotic theories for the multivariate realized kernel estimator of Barndorff-Nielsen et al. (2011). We show in extensive simulations that our method outperforms the time domain estimators when two assets with different liquidity are traded asynchronously.

Citation

Park, S., Young Hong, S., & Linton, O. (2016). Estimating the quadratic covariation matrix for asynchronously observed high frequency stock returns corrupted by additive measurement error. Journal of Econometrics, 191(2), (325-347). doi:10.1016/j.jeconom.2015.12.005. ISSN 0304-4076

Journal Article Type Article
Acceptance Date Jul 24, 2015
Online Publication Date Dec 23, 2015
Publication Date Apr 4, 2016
Deposit Date Oct 22, 2018
Publicly Available Date Mar 29, 2024
Journal Journal of Econometrics
Print ISSN 0304-4076
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 191
Issue 2
Pages 325-347
DOI https://doi.org/10.1016/j.jeconom.2015.12.005
Keywords Quadratic covariation; Market microstructure noise; Asynchronous observations; Fourier Realized Kernel
Public URL https://nottingham-repository.worktribe.com/output/1178758
Publisher URL https://www.sciencedirect.com/science/article/pii/S030440761500281X

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