Weighted Least Squares Realized Covariation Estimation

Li, Yifan and Nolte, Ingmar and Vasios, Michalis and Voev, Valeri and Xu, Qi (2022) Weighted Least Squares Realized Covariation Estimation. Journal of Banking and Finance. ISSN 0378-4266 (In Press)

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We introduce a novel weighted least squares approach to estimate daily realized covariation and microstructure noise variance using high-frequency data. We provide an asymptotic theory and conduct a comprehensive Monte Carlo simulation to demonstrate the desirable statistical properties of the new estimator, compared with existing estimators in the literature. Using high-frequency data of 27 DJIA constituting stocks over a period from 2014 to 2020, we confirm that the new estimator performs well in comparison with existing estimators. We also show that the noise variance extracted based on our method can be used to improve volatility forecasting and asset allocation performance.

Item Type:
Journal Article
Journal or Publication Title:
Journal of Banking and Finance
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Deposited On:
17 Jan 2022 14:40
In Press
Last Modified:
14 May 2022 02:23