Liquidity and realized range-based volatility forecasting: Evidence from China

Yanyan Xu, Dengshi Huang, Feng Ma and Gaoxiu Qiao

Physica A: Statistical Mechanics and its Applications, 2019, vol. 525, issue C, 1102-1113

Abstract: This paper examines the dynamical impact of market wide liquidity on the volatility by using the Markov switching-regime approach on the Heterogeneous Autoregressive model of the realized range-based volatility (MS-HAR-RRV-LIQ). First, based on the simple partition of the liquidity measures by their historical means, we find the impact of the market liquidity on the realized range-based volatility (RRV) is non-linear with significantly stronger when the market is fluctuating. Second, by utilizing the method of Markov regimes switching, we find that in sample results, the impact of market liquidity on RRV is dynamics with much stronger when the market is fluctuating. In addition, the impact of liquidity on RRV are persistent for both the fluctuating state and the stable state, which indicate that the impact of liquidity on volatility would remain in its original state unless there are major economic events. Third, in order to eliminate the hidden information of volatility in liquidity measures, we further decompose the liquidity measures to obtain the volatility-adjusted liquidity, and find that the impact of liquidity driven by the component of liquidity uncorrelated with volatility on market volatility is also dynamics with much stronger when the market is fluctuating. Finally, out-of-sample results suggest that the models of HAR-RRV-LIQ and their corresponding volatility-adjusted liquidity models with regimes switching can increase the forecasting ability significantly than those without regime switching.

Keywords: HAR-RRV model; Volatility-adjusted liquidity; Realized range-based volatility; Markov regimes switching model (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378437119303577
Full text for ScienceDirect subscribers only. Journal offers the option of making the article available online on Science direct for a fee of $3,000

Related works:
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:eee:phsmap:v:525:y:2019:i:c:p:1102-1113

DOI: 10.1016/j.physa.2019.03.122

Access Statistics for this article

Physica A: Statistical Mechanics and its Applications is currently edited by K. A. Dawson, J. O. Indekeu, H.E. Stanley and C. Tsallis

More articles in Physica A: Statistical Mechanics and its Applications from Elsevier
Bibliographic data for series maintained by Catherine Liu ().