Correcting microstructure comovement biases for integrated covariance

Jin Huei Yeh, Jying Nan Wang

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

Finding a precise variance-covariance matrix is the building block of empirical finance. While microstructure-noise-robust methods for realized volatility are in the mainstream of financial econometrics, little if any attention has been devoted to estimating a noise-free realized covariance for overlooking the well-documented manifestation of commonality in market microstructure factors such as order flows, liquidity or herding. By documenting and recognizing this fact, we propose a microstructure-noise-free nonparametric covariance estimator to uncover the virtual integrated covariance. The estimator is easy to implement and performs admirably.

Original languageEnglish
Pages (from-to)184-191
Number of pages8
JournalFinance Research Letters
Volume7
Issue number3
DOIs
StatePublished - Sep 2010

Keywords

  • Bias correction
  • C01
  • C10
  • C14
  • C22
  • Commonality
  • Market microstructure
  • Realized covariance

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