The fine structure of volatility feedback II: overnight and intra-day effects

Rémy Chicheportiche, Jean-Philippe Bouchaud () and Pierre Blanc
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Rémy Chicheportiche: MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris, FiQuant - Chaire de finance quantitative - MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec, Science et Finance - Science et Finance
Jean-Philippe Bouchaud: Science et Finance - Science et Finance
Pierre Blanc: MATHRISK - Mathematical Risk handling - Inria Paris-Rocquencourt - Inria - Institut National de Recherche en Informatique et en Automatique - UPEM - Université Paris-Est Marne-la-Vallée - ENPC - École nationale des ponts et chaussées

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Abstract: We decompose, within an ARCH framework, the daily volatility of stocks into overnight and intra-day contributions. We find, as perhaps expected, that the overnight and intra-day returns behave completely differently. For example, while past intra-day returns affect equally the future intra-day and overnight volatilities, past overnight returns have a weak effect on future intra-day volatilities (except for the very next one) but impact substantially future overnight volatilities. The exogenous component of overnight volatilities is found to be close to zero, which means that the lion's share of overnight volatility comes from feedback effects. The residual kurtosis of returns is small for intra-day returns but infinite for overnight returns. We provide a plausible interpretation for these findings, and show that our Intra-day/Overnight model significantly outperforms the standard ARCH framework based on daily returns for Out-of-Sample predictions.

Date: 2014-05-15
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Published in Physica A: Statistical Mechanics and its Applications, 2014, 402, pp.58-75. ⟨10.1016/j.physa.2014.01.047⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01010333

DOI: 10.1016/j.physa.2014.01.047

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