Forecasting Realized Volatility: The role of implied volatility, leverage effect, overnight returns and volatility of realized volatility

Dimos Kambouroudis, David McMillan and Katerina Tsakou
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Dimos Kambouroudis: Department of Accounting and Finance, University of Stirling
David McMillan: Department of Accounting and Finance, University of Stirling
Katerina Tsakou: School of Management, Swansea University

No 2019-03, Working Papers from Swansea University, School of Management

Abstract: We examine the role of implied volatility, leverage effect, overnight returns and volatility of realized volatility in forecasting realized volatility by extending the heterogeneous autoregressive (HAR) model to include these additional variables. We find that implied volatility is important in forecasting future realized volatility. In most cases a model that accounts for implied volatility provides a significantly better forecast than more sophisticated models that account for other features of volatility, but exclude the information backed out from option prices. This result is consistent over time. We also assess whether leverage effect, overnight returns and volatility of realized volatility carry any incremental information beyond that captured by implied volatility and past realized volatility. We find that while overnight returns and leverage e˙ect are important for some markets, the volatility of realized volatility is of limited value for most stock markets.

Keywords: HAR model; realized volatility; implied volatility; implied volatility effects; leverage effect; overnight returns; GARCH (search for similar items in EconPapers)
Pages: 27 pages
Date: 2019-12-12
New Economics Papers: this item is included in nep-ets, nep-fmk and nep-for
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https://rahwebdav.swan.ac.uk/repec/pdf/WP2019-03.pdf First version, 2019 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:swn:wpaper:2019-03

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