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Forecasting volatility with the realized range in the presence of noise and non-trading

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  • Bannouh, Karim
  • Martens, Martin
  • van Dijk, Dick

Abstract

We introduce a heuristic bias-adjustment for the transaction price-based realized range estimator of daily volatility in the presence of bid–ask bounce and non-trading. The adjustment is an extension of the estimator proposed in Christensen et al. (2009). We relax the assumption that all intraday high (low) transaction prices are at the ask (bid) quote. Using data-based simulations we obtain estimates of the probability that a given intraday range is (upward or downward) biased or not, which we use for a more refined bias-adjustment of the realized range estimator. Both Monte Carlo simulations and an empirical application involving a liquid and a relatively illiquid S&P500 constituent demonstrate that ex post measures and ex ante forecasts based on the heuristically adjusted realized range compare favorably to existing bias-adjusted (two time scales) realized range and (two time scales) realized variance estimators.

Suggested Citation

  • Bannouh, Karim & Martens, Martin & van Dijk, Dick, 2013. "Forecasting volatility with the realized range in the presence of noise and non-trading," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 535-551.
    • Handle: RePEc:eee:ecofin:v:26:y:2013:i:c:p:535-551
    DOI: 10.1016/j.najef.2013.02.020
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    Cited by:

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    2. Xu Gong & Boqiang Lin, 2018. "Structural breaks and volatility forecasting in the copper futures market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(3), pages 290-339, March.
    3. Liu, Qiang & Liu, Yiqi & Liu, Zhi & Wang, Li, 2018. "Estimation of spot volatility with superposed noisy data," The North American Journal of Economics and Finance, Elsevier, vol. 44(C), pages 62-79.
    4. Vortelinos, Dimitrios I. & Lakshmi, Geeta, 2015. "Market risk of BRIC Eurobonds in the financial crisis period," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 295-310.
    5. Arısoy, Yakup Eser & Altay-Salih, Aslıhan & Akdeniz, Levent, 2015. "Aggregate volatility expectations and threshold CAPM," The North American Journal of Economics and Finance, Elsevier, vol. 34(C), pages 231-253.
    6. Kearney, Fearghal & Murphy, Finbarr & Cummins, Mark, 2015. "An analysis of implied volatility jump dynamics: Novel functional data representation in crude oil markets," The North American Journal of Economics and Finance, Elsevier, vol. 33(C), pages 199-216.
    7. Tseng, Tseng-Chan & Lee, Chien-Chiang & Chen, Mei-Ping, 2015. "Volatility forecast of country ETF: The sequential information arrival hypothesis," Economic Modelling, Elsevier, vol. 47(C), pages 228-234.

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    More about this item

    Keywords

    Realized variance; Realized range; Two time scales; High frequency data; Market microstructure noise; Forecasting;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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