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

Author:

Peter Reinhard Hansen, Yiyao Luo

Keyword:

Economics, Econometrics, Econometrics (econ.EM), Statistical Finance (q-fin.ST), Applications (stat.AP)

journal:

date:

2023-10-29 16:00:00

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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