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Journal of Financial Econometrics Advance Access originally published online on August 4, 2009
Journal of Financial Econometrics 2009 7(4):341-372; doi:10.1093/jjfinec/nbp012
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© The Author 2009. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org.

Range-Based Covariance Estimation Using High-Frequency Data: The Realized Co-Range*

Karim Bannouh
     Econometric Institute, Erasmus University Rotterdam

Dick van Dijk
     Econometric Institute, Erasmus University Rotterdam

Martin Martens
     Erasmus University Rotterdam

Address correspondence to Dick van Dijk, Econometric Institute, Erasmus University Rotterdam, P.O. Box 1738, NL-3000 DR Rotterdam, The Netherlands, or e-mail: djvandijk{at}ese.eur.nl.

JEL Classification: C13, C14, G11


  Abstract

We introduce the realized co-range, a novel estimator of the daily covariance between asset returns based on intraday high–low price ranges. In an ideal world, the co-range is five times more efficient than the realized covariance, which uses cross-products of intraday returns, when sampling at the same frequency. In Monte Carlo simulations, we find that for plausible levels of bid–ask bounce, infrequent trading and nonsynchronous trading, the realized co-range still improves upon the realized covariance. In a volatility timing strategy for S&P500, bond and gold futures, we find that the co-range estimates are less noisy, which results in lower transaction costs and higher Sharpe ratios.

KEYWORDS: bias-correction, high-frequency data, market microstructure noise, realized co-range, realized covariance

* We thank participants of the conference on "Multivariate Volatility Models" (Faro, October 2007), of the first International Conference in memory of Carlo Giannini on "Recent Developments in Econometric Methodology" (Bergamo, January 2008), and of the Oxford-Man Institute of Quantitative Finance conference on "Financial Econometrics and Vast Data" (Oxford, September 2008), the editors Eric Renault and Eric Ghysels, and an anonymous referee for helpful comments and suggestions.

Received January 16, 2008; revised July 8, 2009; accepted July 8, 2009


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