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    Rights statement: This is the author’s version of a work that was accepted for publication in Journal of Banking and Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Banking and Finance, 137, 106420, 2022 DOI: 10.1016/j.jbankfin.2022.106420

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    Available under license: CC BY-NC-ND: Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License

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Weighted Least Squares Realized Covariation Estimation

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Article number106420
<mark>Journal publication date</mark>30/04/2022
<mark>Journal</mark>Journal of Banking and Finance
Volume137
Number of pages21
Publication StatusPublished
Early online date3/03/22
<mark>Original language</mark>English

Abstract

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.

Bibliographic note

This is the author’s version of a work that was accepted for publication in Journal of Banking and Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Banking and Finance, 137, 106420, 2022 DOI: 10.1016/j.jbankfin.2022.106420