A closed-form formula characterization of the Epps effect. Issue 2 (1st February 2020)

• Record Type: Journal Article
• Authors: Buccheri, Giuseppe; Livieri, Giulia; Pirino, Davide; Pollastri, Alessandro
• Is Part Of: Quantitative finance. Volume 20:Issue 2(2020)
• Page Start: 243
• Page End: 254
• Publication Date: 2020-02-01
• Subjects: Epps effect -- Realized covariance -- Infill asymptotic -- Liquidity; G10 -- C12; Finance -- Periodicals; Business mathematics -- Periodicals; Finance -- Mathematical models -- Periodicals; Investments -- Mathematics -- Periodicals; Economics -- Periodicals; Finances -- Modèles mathématiques -- Périodiques; 332.015118
• DOI: 10.1080/14697688.2019.1659992
• Languages: English
• ISSNs: 1469-7688

Abstract

Abstract : In this study we provide an analytical characterization of the impact of zero returns on the popular realized covariance estimator of Barndorff-Nielsen and Shephard [Econometric analysis of realized covariation: High frequency based covariance, regression, and correlation in financial economics. Econometrica, 2004, 72 (3), 885–925]. In our framework, efficient price processes evolve as a semimartingale with some likelihood of repeated prices. We show that the standard realized covariance estimator is asymptotically affected by a downward bias, and the size of the bias depends on these likelihoods. We demonstrate that this result can be used to construct a consistent estimator of the integrated covariance of a vector semimartingale. The advantages with respect to other estimators are discussed with data.