Abstract:We analyze the effects of non-synchronicity and market microstructure noise on realized covari-ance type estimators. It is shown that non-synchronicity leads to severe biases, whenever synchro-nization methods that employ last-tick interpolation are used. We study a simple estimator whichresolves that problem and is unbiased and consistent for the integrated covariance in the absence ofnoise. When noise is present, however, we show that this estimator is biased and suggest a simplebias correction procedure. Furthermore, a subsampling version of the estimator is
www.51lunwen.orgproposed, whichcould improve its efficiency. Finally, a simulation experiment is carried out to illustrate the theoreticalresults.
Keywords: Integrated covariance, Epps effect, Non-synchronous trading, Market Microstructure
1 Introduction
2 Theoretical Framework
2.1 The Price Process
2.2 Asymptotic Theory for Realized Covariation
2.3 Covariance Estimators in the Presence of Noise
3 The IID Noise Case
4 The General Noise Case
5 Monte Carlo Study
6 Conclusion
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