NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

A No-Arbitrage Approach to Range-Based Estimation of Return Covariances and Correlations

Michael W. Brandt, Francis X. Diebold

NBER Working Paper No. 9664
Issued in May 2003
NBER Program(s):   AP

We extend range-based volatility estimation to the multivariate case. In particular, we propose a range-based covariance estimator motivated by a key financial economic consideration, the absence of arbitrage, in addition to statistical considerations. We show that this estimator is highly efficient yet robust to market microstructure noise arising from bid-ask bounce and asynchronous trading.

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Document Object Identifier (DOI): 10.3386/w9664

Published: Michael W. Brandt & Francis X. Diebold, 2006. "A No-Arbitrage Approach to Range-Based Estimation of Return Covariances and Correlations," Journal of Business, University of Chicago Press, vol. 79(1), pages 61-74, January.

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