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Title:A blocking and regularization approach to high dimensional realized covariance estimation PDF Logo
Authors:Hautsch, Nikolaus
Kyj, Lada M.
Oomen, Roel C.A.
Issue Date:2009
Series/Report no.:SFB 649 discussion paper 2009,049
Abstract:We introduce a regularization and blocking estimator for well-conditioned high-dimensional daily covariances using high-frequency data. Using the Barndorff-Nielsen, Hansen, Lunde, and Shephard (2008a) kernel estimator, we estimate the covariance matrix block-wise and regularize it. A data-driven grouping of assets of similar trading frequency ensures the reduction of data loss due to refresh time sampling. In an extensive simulation study mimicking the empirical features of the S&P 1500 universe we show that the 'RnB' estimator yields efficiency gains and outperforms competing kernel estimators for varying liquidity settings, noise-to-signal ratios, and dimensions. An empirical application of forecasting daily covariances of the S&P 500 index confirms the simulation results.
Subjects:covariance estimation
blocking
realized kernel
regularization
microstructure
asynchronous trading
JEL:C14
C22
Document Type:Working Paper
Appears in Collections:SFB 649 Discussion Papers, HU Berlin

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