A coupled component GARCH model for intraday and overnight volatility

Oliver Linton and Jianbin Wu
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Jianbin Wu: Institute for Fiscal Studies

No CWP05/17, CeMMAP working papers from Centre for Microdata Methods and Practice, Institute for Fiscal Studies

Abstract: We propose a semi-parametric coupled component GARCH model for intraday and overnight volatility that allows the two periods to have di fferent properties. To capture the very heavy tails of overnight returns, we adopt a dynamic conditional score model with t innovations. We propose a several step estimation procedure that captures the nonparametric slowly moving components by kernel estimation and the dynamic parameters by t maximum likelihood. We establish the consistency and asymptotic normality of our estimation procedures. We extend the modelling to the multivariate case. We apply our model to the study of the Dow Jones industrial average component stocks over the period 1991-2016 and the CRSP cap based portfolios over the period of 1992-2015. We show that actually the ratio of overnight to intraday volatility has increased in importance for big stocks in the last 20 years. In addition, our model provides better intraday volatility forecast since it takes account of the full dynamic consequences of the overnight shock and previous ones.

Date: 2017-01-26
New Economics Papers: this item is included in nep-ets, nep-mst and nep-rmg
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Related works:
Working Paper: A Coupled Component GARCH Model for Intraday and Overnight Volatility (2018)
Working Paper: A coupled component GARCH model for intraday and overnight volatility (2016)
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