Forecasting Volatility with the Realized Range in the Presence of Noise and Non-Trading
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.
|Keywords||forecasting, high frequency data, market microstructure noise, realized range, realized variance, two time scales|
|JEL||Forecasting and Other Model Applications (jel C53), Financial Forecasting (jel G17)|
|Publisher||Erasmus Research Institute of Management|
|Series||ERIM Report Series Research in Management|
Bannouh, K, Martens, M.P.E, & van Dijk, D.J.C. (2012). Forecasting Volatility with the Realized Range in the Presence of Noise and Non-Trading (No. ERS-2012-018-F&A). ERIM Report Series Research in Management. Erasmus Research Institute of Management. Retrieved from http://hdl.handle.net/1765/37538