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Estimating overnight volatility of asset returns by using the generalized dynamic factor model approach

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  • Umberto Triacca
  • Fulvia Focker

Abstract

This paper proposes a new approach to estimate the overnight volatility of an individual stock return. Since markets generally do not trade during the overnight period, measures of realized volatility cannot be computed on a “high-frequency” basis. Some studies have resorted to using the square overnight return as a proxy for the overnight realized volatility, but this measure is typically very noisy. The new estimator of the overnight volatility proposed is obtained using the generalized dynamic factor model. The performance of the new proxy is examined using simulated data. This is found to perform better than the squared overnight return. Empirical analysis of the S&P100 constituents confirms the potential of this proxy. Copyright Springer-Verlag 2014

Suggested Citation

  • Umberto Triacca & Fulvia Focker, 2014. "Estimating overnight volatility of asset returns by using the generalized dynamic factor model approach," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 37(2), pages 235-254, October.
    • Handle: RePEc:spr:decfin:v:37:y:2014:i:2:p:235-254
    DOI: 10.1007/s10203-012-0130-x
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    1. Jayawardena, Nirodha I. & Todorova, Neda & Li, Bin & Su, Jen-Je, 2020. "Volatility forecasting using related markets’ information for the Tokyo stock exchange," Economic Modelling, Elsevier, vol. 90(C), pages 143-158.
    2. Laurence E. Blose & Vijay Gondhalekar & Alan Kort, 2018. "Overnight versus day returns in gold and gold related assets," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 42(3), pages 526-549, July.

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    More about this item

    Keywords

    Dynamic factor model; Overnight volatility; Realized volatility; 60G99; G1;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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