Working Paper: NBER ID: w9664
Authors: Michael W. Brandt; Francis X. Diebold
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: No keywords provided
JEL Codes: G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| absence of triangular arbitrage (F31) | estimation of covariances (C10) |
| absence of triangular arbitrage (F31) | accurate covariance estimation (C10) |
| range-based methods (C51) | variances (C29) |
| variances (C29) | covariances (C10) |
| covariance estimator is unbiased under conditions (C51) | unbiasedness of Parkinson's variance estimator (C51) |
| nonlinear transformations (C51) | potential biases in correlation (C10) |