The Economic Value of Volatility Timing using a Range-Based Volatility Model

Abstract

There is growing interest in utilizing the range data of asset prices to study the role of volatility in financial markets. In this paper, a new range-based volatility model is used to examine the economic value of volatility timing in a mean-variance framework. We compare its performance with a return-based dynamic volatility model in both in-sample and out-of-sample volatility timing strategies. For a risk-averse investor, it is shown that the predictable ability captured by the dynamic volatility models is economically significant, and that the range-based volatility model performs better than the return-based one.

Keywords: Asset allocation, CARR, DCC, Economic value, Range, Volatility timing

JEL Classification: C5, C52, G11