Estimating the Spot Covariation of Asset Prices—Statistical Theory and Empirical Evidence

Author(s)
Markus Bibinger, Nikolaus Hautsch, Peter Malec, Markus Reiss
Abstract

We propose a new estimator for the spot covariance matrix of a multi-dimensional continuous semimartingale log asset price process, which is subject to noise and nonsynchronous observations. The estimator is constructed based on a local average of block-wise parametric spectral covariance estimates. The latter originate from a local method of moments (LMM), which recently has been introduced by Bibinger et al.. We prove consistency and a point-wise stable central limit theorem for the proposed spot covariance estimator in a very general setup with stochastic volatility, leverage effects, and general noise distributions. Moreover, we extend the LMM estimator to be robust against autocorrelated noise and propose a method to adaptively infer the autocorrelations from the data. Based on simulations we provide empirical guidance on the effective implementation of the estimator and apply it to high-frequency data of a cross-section of Nasdaq blue chip stocks. Employing the estimator to estimate spot covariances, correlations, and volatilities in normal but also unusual periods yields novel insights into intraday covariance and correlation dynamics. We show that intraday (co-)variations (i) follow underlying periodicity patterns, (ii) reveal substantial intraday variability associated with (co-)variation risk, and (iii) can increase strongly and nearly instantaneously if new information arrives. Supplementary materials for this article are available online.

Organisation(s)
Department of Statistics and Operations Research, Research Network Data Science
External organisation(s)
Philipps Universität Marburg, University of Cambridge, Humboldt-Universität zu Berlin
Journal
Journal of Business and Economic Statistics
Volume
37
Pages
419-435
ISSN
0735-0015
DOI
https://doi.org/10.1080/07350015.2017.1356728
Publication date
12-2017
Peer reviewed
Yes
Austrian Fields of Science 2012
502025 Econometrics
Keywords
Portal url
https://ucris.univie.ac.at/portal/en/publications/estimating-the-spot-covariation-of-asset-pricesstatistical-theory-and-empirical-evidence(bef76819-af84-4686-91ef-fb96089fa8e8).html