Template-Type: ReDIF-Paper 1.0
Author-Name: Bannouh, K.
Author-Name-Last: Bannouh
Author-Name-First: Karim
Author-Name: Martens, M.P.E.
Author-Name-Last: Martens
Author-Name-First: Martin
Author-Name: van Dijk, D.J.C.
Author-Name-Last: van Dijk
Author-Name-First: Dick
Author-Person: pva27
Title: Forecasting Volatility with the Realized Range in the Presence of Noise and Non-Trading
Abstract: We introduce a heuristic bias-adjustment for the transaction price-based realized range estimator of daily volatility in the presence of bid-ask bounce and non-trading. The adjustment is an extension of the estimator proposed in Christensen et al. (2009). We relax the assumption that all intra-day high (low) transaction prices are at the ask (bid) quote. Using data-based simulations we obtain estimates of the probability that a given intraday range is (upward or downward) biased or not, which we use for a more refined bias-adjustment of the realized range estimator. Both Monte Carlo simulations and an empirical application involving a liquid and a relatively illiquid S&P500 constituent demonstrate that ex post measures and ex ante forecasts based on the heuristically adjusted realized range compare favorably to existing bias-adjusted (two time scales) realized range and (two time scales) realized variance estimators.
Creation-Date: 2012-10-25
File-URL: https://repub.eur.nl/pub/37538/ERS-2012-018-F&A.pdf
File-Format: application/pdf
Series: RePEc:ems:eureri
Number: ERS-2012-018-F&A
Classification-JEL: C53, G17
Keywords: forecasting, high frequency data, market microstructure noise, realized range, realized variance, two time scales
Handle: RePEc:ems:eureri:37538