Correlations and Volatilities of Asynchronous Data

Asset prices are typically measured when markets close, although closing times may differ across markets. As a result, returns appear to have predictability, and correlations are understated. This will distort the value of portfolios, value at risk measures, and hedge strategies. A solution is to &q...

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Bibliographic Details
Published in:The Journal of derivatives 1998-07, Vol.5 (4), p.7-18
Main Authors: Burns, Patrick, Engle, Robert F, Mezrich, Joseph J
Format: Article
Language:English
Subjects:
Correlation analysis
Estimating techniques
Portfolio management
Securities markets
Stock prices
Studies
Volatility
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Summary:Asset prices are typically measured when markets close, although closing times may differ across markets. As a result, returns appear to have predictability, and correlations are understated. This will distort the value of portfolios, value at risk measures, and hedge strategies. A solution is to "synchronize" prices by computing estimates of the values of assets even when markets are closed, given information from markets that are open. From these prices, synchronized returns are defined and can be used to perform standard calculations including measuring time-varying volatilities and correlations with GARCH. The method is applied to G-7 index data.
ISSN:1074-1240
2168-8524
DOI:10.3905/jod.1998.408000