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Forecasting Volatility with the Realized Range in the Presence of Noise and Non-Trading

Karim Bannouh, Martin Martens and Dick van Dijk ()

No ERS-2012-018-F&A, ERIM Report Series Research in Management from Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam

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 intra-day 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: forecasting; high frequency data; market microstructure noise; realized range; realized variance; two time scales (search for similar items in EconPapers)
JEL-codes: C53 G17 (search for similar items in EconPapers)
Date: 2012-10-25
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Journal Article: Forecasting volatility with the realized range in the presence of noise and non-trading (2013) Downloads
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