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The Journal of Portfolio Management

The Journal of Portfolio Management

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Article

The Divergence of High- and Low-Frequency Estimation:
Causes and Consequences

William Kinlaw, Mark Kritzman and David Turkington
The Journal of Portfolio Management Special 40th Anniversary Issue 2014, 40 (5) 156-168; DOI: https://doi.org/10.3905/jpm.2014.40.5.156
William Kinlaw
is senior managing director at State Street Associates in Cambridge, MA. wbkinlaw@statestreet.com
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Mark Kritzman
is president and CEO of Windham Capital Management and senior lecturer at MIT Sloan School in Cambridge, MA. kritzman@mit.edu
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David Turkington
is managing director at State Street Associates in Cambridge, MA. dturkington@statestreet.com
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Abstract

Financial analysts typically estimate volatilities and correlations from monthly or higher-frequency returns when determining the optimal composition of a portfolio. Although it is widely acknowledged that these measures are not necessarily stationary across samples, most analysts assume implicitly that, within sample, volatilities scale with the square root of time and correlations estimated from high-frequency returns are similar to correlations estimated from low-frequency returns. Evidence does not support this view. Instead, evidence shows that relative asset values often evolve through time in ways that are highly inconsistent with their high-frequency volatilities and correlations. As a consequence, portfolios that are optimal based on high-frequency returns often lead to significantly suboptimal results for investors with long horizons. The causes and consequences of this discrepancy are analyzed by the article’s authors, as well as presenting a framework for constructing portfolios that balance short-horizon and long-horizon optimality.

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The Journal of Portfolio Management: 40 (5)
The Journal of Portfolio Management
Vol. 40, Issue 5
Special 40th Anniversary Issue 2014
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The Divergence of High- and Low-Frequency Estimation:
Causes and Consequences
William Kinlaw, Mark Kritzman, David Turkington
The Journal of Portfolio Management Sep 2014, 40 (5) 156-168; DOI: 10.3905/jpm.2014.40.5.156

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The Divergence of High- and Low-Frequency Estimation:
Causes and Consequences
William Kinlaw, Mark Kritzman, David Turkington
The Journal of Portfolio Management Sep 2014, 40 (5) 156-168; DOI: 10.3905/jpm.2014.40.5.156
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  • Article
    • Abstract
    • EVIDENCE OF THE DIVERGENCE OF HIGH- AND LOW-FREQUENCY ESTIMATION
    • MATHEMATICS OF EXCESS DISPERSION
    • COMPARATIVE STATICS
    • BALANCING LONG- AND SHORT-HORIZON OPTIMALITY
    • SUMMARY
    • APPENDIX A
    • APPENDIX B
    • APPENDIX C
    • ENDNOTES
    • REFERENCES
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  • PDF

Cited By...

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