Measuring volatility with the realized range
Realized variance, being the summation of squared intra-day returns, has quickly gained popularity as a measure of daily volatility. Following Parkinson (1980) we replace each squared intra-day return by the high-low range for that period to create a novel and more efficient estimator called the realized range. In addition we suggest a bias-correction procedure to account for the effects of microstructure frictions based upon scaling the realized range with the average level of the daily range. Simulation experiments demonstrate that for plausible levels of non-trading and bid-ask bounce the realized range has a lower mean squared error than the realized variance, including variants thereof that are robust to microstructure noise. Empirical analysis of the S&P500 index-futures and the S&P100 constituents confirm the potential of the realized range.
|Keywords||bias-correction, high-frequency data, high-low range, market microstructure noise, realized volatility|
Martens, M.P.E., & van Dijk, D.J.C.. (2006). Measuring volatility with the realized range (No. EI 2006-10). Report / Econometric Institute, Erasmus University Rotterdam. Retrieved from http://hdl.handle.net/1765/7582