Diversification and the benefits of using returns standardized by range‐based volatility estimators

The aim of our research is to analyse the benefits for the U.S. investors of combining their domestic exchange trade fund (ETF) with ETFs, which track other developed markets such as the United Kingdom, Japan, Germany, and France. We evaluate the out‐of‐sample performance of six strategies using the returns and volatility forecasts from a VAR Asymmetric Dynamic Conditional Correlation GARCH approach where returns standardized by range‐based volatility estimators were used as endogenous variables. The initial outperformances of some strategies using classic returns were significantly improved when returns were standardized by the Garman–Klass precise volatility estimator. Additionally, we find a large decrease in the weights of the North American ETF in the best performing strategies, meaning that it is possible to obtain benefits from diversification. These findings are relevant not only for academics but also for active professional managers who can use this technique to add value to their international diversification strategies.