EconPapers    
Economics at your fingertips  
 

A Coupled Component GARCH Model for Intraday and Overnight Volatility

Oliver Linton and JunJie Wu

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: We propose a semi-parametric coupled component GARCH model for intraday and overnight volatility that allows the two return series to have different properties. We adopt a dynamic conditional score model with t-distributed innovations that captures the very heavy tails of overnight returns. We propose a several-step estimation procedure that captures the nonparametric slowly moving components by kernel estimation and the dynamic parameters by estimated maximum likelihood. We establish the consistency, asymptotic normality, and semiparametric efficiency of our semiparametric estimation procedures. We extend the modelling to the multivariate case where we allow time varying correlation between stocks. We apply our model to the study of Dow Jones industrial average component stocks, CRSP size-based portfolios, and size-based portfolios in four large international markets over the period 1993-2017. We show that the ratio of overnight to intraday volatility has actually increased in importance for Dow Jones stocks during the last two decades. This ratio has also increased for large stocks in the CRSP database, but decreased for small stocks in CRSP. Notably, the slope increases monotonically from the smallest-cap decile to the largest-cap decile. This pattern also exists in other international markets. The multivariate model shows that overnight and intraday correlations have both increased, but overnight correlations have increased more substantially during recent crises than intraday correlations.

Keywords: DCS; GAS; GARCH; size-based portfolios; Testing (search for similar items in EconPapers)
JEL-codes: C12 C13 (search for similar items in EconPapers)
Date: 2018-09-14
New Economics Papers: this item is included in nep-mst and nep-rmg
Note: obl20
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1879.pdf

Related works:
Working Paper: A coupled component GARCH model for intraday and overnight volatility (2017) Downloads
Working Paper: A coupled component GARCH model for intraday and overnight volatility (2016) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:1879

Access Statistics for this paper

More papers in Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge
Bibliographic data for series maintained by Jake Dyer (jd419@cam.ac.uk).

 
Page updated 2024-12-28
Handle: RePEc:cam:camdae:1879