Covariance estimation and dynamic asset allocation under microstructure effects via Fourier methodology

Maria Elvira Mancino and Simona Sanfelici ()
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Simona Sanfelici: Dipartimento di Economia, University of Parma

No 2009-09, Working Papers - Mathematical Economics from Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa

Abstract: We analyze the properties of different estimators of multivariate volatilities in the presence of microstructure noise, with particular focus on the Fourier estimator. This estimator is consistent in the case of asynchronous data and robust to microstructure effects; further we prove the positive semi-definiteness of the estimated covariance matrix. The in sample and forecasting properties of Fourier method are analyzed through Monte Carlo simulations. We study the economic benefit of applying the Fourier covariance estimation methodology over other estimators in the presence of market microstructure noise from the perspective of an asset-allocation decision problem. We find that using Fourier methodology yields statistically significant economic gains under strong microstructure effects.

Keywords: nonparametric covariance estimation; non-synchronicity; microstructure; optimal portfolio choice; Fourier analysis (search for similar items in EconPapers)
JEL-codes: C14 C22 G11 (search for similar items in EconPapers)
Pages: 28
Date: 2009-12
New Economics Papers: this item is included in nep-ecm and nep-mst
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Chapter: Covariance Estimation and Dynamic Asset-Allocation under Microstructure Effects via Fourier Methodology (2011)
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