Volatility Estimation and Forecasts Based on Price Durations*

Seok Young Hong, Ingmar Nolte, Stephen J Taylor and Xiaolu Zhao

Journal of Financial Econometrics, 2023, vol. 21, issue 1, 106-144

Abstract: We investigate price duration variance estimators that have long been neglected in the literature. In particular, we consider simple-to-construct non-parametric duration estimators, and parametric price duration estimators using autoregressive conditional duration specifications. This paper shows (i) how price duration estimators can be used for the estimation and forecasting of the integrated variance of an underlying semi-martingale price process and (ii) how they are affected by discrete and irregular spacing of observations, market microstructure noise, and finite price jumps. Specifically, we contribute to the literature by constructing the asymptotic theory for the non-parametric estimator with and without the presence of bid/ask spread and time discreteness. Further, we provide guidance about how our estimators can best be implemented in practice by appropriately selecting a threshold parameter that defines a price duration event, or by averaging over a range of non-parametric duration estimators. We also provide simulation and forecasting evidence that price duration estimators can extract relevant information from high-frequency data better and produce more accurate forecasts than competing realized volatility and option-implied variance estimators, when considered in isolation or as part of a forecasting combination setting.

Keywords: forecasting; high-frequency data; market microstructure noise; price durations; volatility estimation (search for similar items in EconPapers)
JEL-codes: C41 C52 C53 C58 (search for similar items in EconPapers)
Date: 2023
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://hdl.handle.net/10.1093/jjfinec/nbab006 (application/pdf)
Access to full text is restricted to subscribers.

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:oup:jfinec:v:21:y:2023:i:1:p:106-144.

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

Journal of Financial Econometrics is currently edited by Allan Timmermann and Fabio Trojani

More articles in Journal of Financial Econometrics from Oxford University Press Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK. Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().