Forecasting stock volatility using after-hour information: Evidence from the Australian Stock Exchange

Nirodha I. Jayawardena, Neda Todorova, Bin Li and Jen-Je Su

Economic Modelling, 2016, vol. 52, issue PB, 592-608

Abstract: Since markets generally do not trade during overnight period, volatility cannot be estimated on a high-frequency basis. We adopt a new forecasting approach by using squared overnight return, pre-open volatility of the same asset and realized volatilities of related assets from other markets, where intraday data is still available while the Australian Stock Exchange (ASX) is closed, to predict stock volatility. We use a number of different specifications of the Heterogeneous Autoregressive (HAR) model to identify an optimal way to incorporate this additional information. We evaluate the forecasting performance of 45 ASX 200 stocks, categorized in three groups based on their annual total trading volumes, three Global Industry Classification Standard (GICS) indices and the S&P/ASX 200 index using a rolling estimation method. Our empirical analysis of the ASX constituents confirms the usefulness of using pre-open volatility of the same asset and realized volatilities of related assets from other markets when the ASX is closed for forecasting future volatility. Furthermore, we find that the predictive power of overnight information for all stocks and indices is higher during the market opening period and declines gradually over the trading day. However, the decrement is steeper for active stocks, suggesting that the predictive power is higher for inactively traded stocks. Finally, we evaluate the economic significance of the augmented HAR model that includes realized volatilities of related assets from other markets, and we find that it provides significant utility gains to a typical mean-variance investor.

Keywords: High frequency data; Realized volatility; Overnight volatility; Forecasting (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0264999315002862
Full text for ScienceDirect subscribers only

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:ecmode:v:52:y:2016:i:pb:p:592-608

DOI: 10.1016/j.econmod.2015.10.004

Access Statistics for this article

Economic Modelling is currently edited by S. Hall and P. Pauly

More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().