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Jump robust daily covariance estimation by disentangling variance and correlation components

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  • Boudt, Kris
  • Cornelissen, Jonathan
  • Croux, Christophe

Abstract

A jump robust positive semidefinite rank-based estimator for the daily covariance matrix based on high-frequency intraday returns is proposed. It disentangles covariance estimation into variance and correlation components. This allows us to account for non-synchronous trading by estimating correlations over lower sampling frequencies. The efficiency gain of disentangling covariance estimation and the jump robustness of the estimator are illustrated in a simulation study. In an application to the Dow Jones Industrial Average constituents, it is shown that the proposed estimator leads to more stable portfolios.

Suggested Citation

  • Boudt, Kris & Cornelissen, Jonathan & Croux, Christophe, 2012. "Jump robust daily covariance estimation by disentangling variance and correlation components," Computational Statistics & Data Analysis, Elsevier, vol. 56(11), pages 2993-3005.
    • Handle: RePEc:eee:csdana:v:56:y:2012:i:11:p:2993-3005
    DOI: 10.1016/j.csda.2011.05.003
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    3. Boudt, Kris & Laurent, Sébastien & Lunde, Asger & Quaedvlieg, Rogier & Sauri, Orimar, 2017. "Positive semidefinite integrated covariance estimation, factorizations and asynchronicity," Journal of Econometrics, Elsevier, vol. 196(2), pages 347-367.
    4. Wenjing Wang & Minjing Tao, 2020. "Forecasting Realized Volatility Matrix With Copula-Based Models," Papers 2002.08849, arXiv.org.
    5. Varneskov, Rasmus & Voev, Valeri, 2013. "The role of realized ex-post covariance measures and dynamic model choice on the quality of covariance forecasts," Journal of Empirical Finance, Elsevier, vol. 20(C), pages 83-95.
    6. de Almeida, Daniel & Hotta, Luiz K. & Ruiz, Esther, 2018. "MGARCH models: Trade-off between feasibility and flexibility," International Journal of Forecasting, Elsevier, vol. 34(1), pages 45-63.
    7. Kim Christensen & Ulrich Hounyo & Zhi Liu, 2024. "A nonparametric test for diurnal variation in spot correlation processes," Papers 2408.02757, arXiv.org.
    8. Asai, Manabu & Chang, Chia-Lin & McAleer, Michael, 2022. "Realized matrix-exponential stochastic volatility with asymmetry, long memory and higher-moment spillovers," Journal of Econometrics, Elsevier, vol. 227(1), pages 285-304.

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