Modelling and Forecasting Noisy Realized Volatility

Manabu Asai, Michael McAleer and Marcelo Medeiros ()

Working Papers in Economics from University of Canterbury, Department of Economics and Finance

Abstract: Several methods have recently been proposed in the ultra high frequency financial literature to remove the effects of microstructure noise and to obtain consistent estimates of the integrated volatility (IV) as a measure of ex-post daily volatility. Even bias-corrected and consistent (modified) realized volatility (RV) estimates of the integrated volatility can contain residual microstructure noise and other measurement errors. Such noise is called “realized volatility error”. Since such measurement errors are ignored, we need to take account of them in estimating and forecasting IV. This paper investigates through Monte Carlo simulations the effects of RV errors on estimating and forecasting IV with RV data. It is found that: (i) neglecting RV errors can lead to serious bias in estimators due to model misspecification; (ii) the effects of RV errors on one-step ahead forecasts are minor when consistent estimators are used and when the number of intraday observations is large; and (iii) even the partially corrected recently proposed in the literature should be fully corrected for evaluating forecasts. This paper proposes a full correction of , which can be applied to linear and nonlinear, short and long memory models. An empirical example for S&P 500 data is used to demonstrate that neglecting RV errors can lead to serious bias in estimating the model of integrated volatility, and that the new method proposed here can eliminate the effects of the RV noise. The empirical results also show that the full correction for is necessary for an accurate description of goodness-of-fit.

Keywords: Realized volatility; diffusion; financial econometrics; measurement errors; forecasting; model evaluation; goodness-of-fit (search for similar items in EconPapers)
Pages: 41 pages
Date: 2010-05-01
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-for and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://repec.canterbury.ac.nz/cbt/econwp/1021.pdf (application/pdf)

Related works:
Journal Article: Modelling and forecasting noisy realized volatility (2012)
Working Paper: Modelling and Forecasting Noisy Realized Volatility (2011)
Working Paper: Modelling and Forecasting Noisy Realized Volatility (2011)
Working Paper: Modelling and Forecasting Noisy Realized Volatility (2011)
Working Paper: Modelling and Forecasting Noisy Realized Volatility (2009)
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:cbt:econwp:10/21

Access Statistics for this paper

More papers in Working Papers in Economics from University of Canterbury, Department of Economics and Finance Private Bag 4800, Christchurch, New Zealand. Contact information at EDIRC.
Bibliographic data for series maintained by Albert Yee ().