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.

forecasting, high frequency data, market microstructure noise, realized range, realized variance, two time scales
Forecasting and Other Model Applications (jel C53), Financial Forecasting (jel G17)
Erasmus Research Institute of Management
ERIM Report Series Research in Management
Erasmus Research Institute of 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