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Holidays, weekends and range-based volatility

Ana-Carmen Díaz-Mendoza and Angel Pardo

The North American Journal of Economics and Finance, 2020, vol. 52, issue C

Abstract: This study analyses the effect of non-trading periods on the forecasting ability of S&P500 index range-based volatility models. We find that volatility significantly diminishes on the first trading day after holidays and weekends, but not after long weekends. Our findings indicate that models that include autoregressive terms that interact with dummies that allow us to capture changes in volatility levels after interrupting periods provide greater explanatory power than simple autoregressive models. Therefore, the shorter the length of the non-trading periods between two trading days, the higher the overestimation of the volatility if this effect is not considered in volatility forecasting.

Keywords: Holiday effect; Weekend effect; Range-volatility estimators; Non-trading periods; Volatility forecasting (search for similar items in EconPapers)
JEL-codes: C53 G17 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.najef.2019.101124

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