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arXiv · 2310.19992

Robust Estimation of Realized Correlation: New Insight about Intraday Fluctuations in Market Betas

Peter Reinhard Hansen·Yiyao Luo
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Abstract

Time-varying volatility is an inherent feature of most economic time-series, which causes standard correlation estimators to be inconsistent. The quadrant correlation estimator is consistent but very inefficient. We propose a novel subsampled quadrant estimator that improves efficiency while preserving consistency and robustness. This estimator is particularly well-suited for high-frequency financial data and we apply it to a large panel of US stocks. Our empirical analysis sheds new light on intra-day fluctuations in market betas by decomposing them into time-varying correlations and relative volatility changes. Our results show that intraday variation in betas is primarily driven by intraday variation in correlations.

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BibTeXRIS

Peter Reinhard Hansen, Yiyao Luo. 2023-10-30. Robust Estimation of Realized Correlation: New Insight about Intraday Fluctuations in Market Betas. https://arxiv.org/abs/2310.19992

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