Forecasting volatility with the realized range in the presence of noise and non-trading

Karim Bannouh, Martin Martens and Dick van Dijk

The North American Journal of Economics and Finance, 2013, vol. 26, issue C, 535-551

Abstract: We introduce a heuristic bias-adjustment for the transaction price-based realized range estimator of daily volatility in the presence of bid–ask bounce and non-trading. The adjustment is an extension of the estimator proposed in Christensen et al. (2009). We relax the assumption that all intraday high (low) transaction prices are at the ask (bid) quote. Using data-based simulations we obtain estimates of the probability that a given intraday range is (upward or downward) biased or not, which we use for a more refined bias-adjustment of the realized range estimator. Both Monte Carlo simulations and an empirical application involving a liquid and a relatively illiquid S&P500 constituent demonstrate that ex post measures and ex ante forecasts based on the heuristically adjusted realized range compare favorably to existing bias-adjusted (two time scales) realized range and (two time scales) realized variance estimators.

Keywords: Realized variance; Realized range; Two time scales; High frequency data; Market microstructure noise; Forecasting (search for similar items in EconPapers)
JEL-codes: C53 C58 G17 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Working Paper: Forecasting Volatility with the Realized Range in the Presence of Noise and Non-Trading (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:26:y:2013:i:c:p:535-551

DOI: 10.1016/j.najef.2013.02.020

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