Range-based covariance estimation using high-frequency data: The realized co-range

Abstract

We introduce the realized co-range, utilizing intraday high-lowprice ranges to estimate asset return covariances. Using simulationswe find that for plausible levels of bid-ask bounce and infrequentand non-synchronous trading the realized co-range improves upon therealized covariance, which uses cross-products of intraday returns.One advantage of the co-range is that in an ideal world it is fivetimes more efficient than the realized covariance when sampling atthe same frequency. The second advantage is that the upward bias dueto bid-ask bounce and the downward bias due to infrequent andnon-synchronous trading partially offset each other. In a volatilitytiming strategy for S\\&P500, bond and gold futures we find that theco-range estimates are less noisy as exemplified by lowertransaction costs and also higher Sharpe ratios when using moreweight on recent data for predicting covariances.bias-correction;market microstructure noise;high-frequency date;realized co-range;realized covariance