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The Bias of Realized Volatility

Janis Becker and Christian Leschinski

Hannover Economic Papers (HEP) from Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät

Abstract: Realized volatility underestimates the variance of daily stock index returns by an average of 14 percent. This is documented for a wide range of international stock indices, using the fact that the average of realized volatility and that of squared returns should be the same over longer time horizons. It is shown that the magnitude of this bias cannot be explained by market microstructure noise. Instead, it can be attributed to correlation between the continuous components of intraday returns and correlation between jumps and previous/subsequent continuous price movements.

Keywords: Return Volatility; Realized Volatility; Squared Returns (search for similar items in EconPapers)
JEL-codes: G11 G12 G17 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm, nep-fmk, nep-mst and nep-rmg
Date: 2018-11
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