Volatility forecasting: intra-day vs. inter-day models

Volatility prediction is the key variable in forecasting the prices of options, value-at-risk and, in general, the risk that investors face. By estimating not only inter-day volatility models that capture the main characteristics of asset returns, but also intra-day models, we were able to investigate their forecasting performance for three European equity indices. A consistent relation is shown between the examined models and the specific purpose of volatility forecasts. Although researchers cannot apply one model for all forecasting purposes, evidence in favor of models that are based on inter-day datasets when their criteria based on daily frequency, such as value-at-risk and forecasts of option prices, are provided.