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Observation-driven Models for Realized Variances and Overnight Returns

Anne Opschoor and Andre Lucas ()
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Anne Opschoor: Vrije Universiteit Amsterdam

No 19-052/IV, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: We present a new model to decompose total daily return volatility into a filtered (high-frequency based) open-to-close volatility and a time-varying scaling factor. We use score-driven dynamics based on fat-tailed distributions to limit the impact of incidental large observations. Applying our new model to 100 stocks of the S&P 500 during the period 2001-2014 and evaluating (in-sample and out-of-sample) in terms of Value-at-Risk and Expected Shortfall, we find our model outperforms alternatives like the HEAVY model that uses close-to-close returns and realized variances, and models treating close-to-open en open-to-close returns as separate processes. Results also indicate that the ratio between total and open-to-close volatility changes substantially through time, especially for financial stocks.

Keywords: overnight volatility; realized variance; F distribution; score-driven dynamics (search for similar items in EconPapers)
JEL-codes: C32 C58 (search for similar items in EconPapers)
Date: 2019-07-31
New Economics Papers: this item is included in nep-ecm, nep-fmk and nep-rmg
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