Forecasting realized volatility: The role of implied volatility, leverage effect, overnight returns, and volatility of realized volatility

We forecast realized volatility extending the heterogeneous autoregressive model (HAR) to include implied volatility (IV), the leverage effect, overnight returns, and the volatility of realized volatility. We analyze 10 international stock indices finding that, although a simple HAR model augmented with IV (HAR‐IV) is more accurate than any HAR model excluding it, all markets support further extensions of the HAR‐IV model. More accurate forecasts are found using overnight returns in all markets except the UK, the volatility of realized volatility in the US, and the leverage effect in five markets. A value‐at‐risk exercise supports the economic significance of our findings.