Volume, Intraday and Overnight Returns for Volatility Prediction: Profitability or Accuracy?

Review of Quantitative Finance and Accounting (Forthcoming)

36 Pages Posted: 24 Jul 2009 Last revised: 19 Dec 2013

See all articles by Ana-Maria Fuertes

Ana-Maria Fuertes

Cass Business School, City University of London

Elena Kalotychou

Cass Business School, City, University of London

Natasa Todorovic

City University London - Sir John Cass Business School

Date Written: July 27, 2010

Abstract

This article presents a comprehensive analysis of the relative ability of three information sets --- daily trading volume, intraday returns and overnight returns --- to predict equity volatility. We investigate the extent to which statistical accuracy of one-day-ahead forecasts translates into economic gains for technical traders. Various profitability criteria and utility-based switching fees indicate that the largest gains stem from combining historical daily returns with volume information. Using common statistical loss functions, the largest degree of predictive power is found instead in intraday returns. Our analysis thus reinforces the view that statistical significance does not have a direct mapping onto economic value. As a byproduct, we show that buying the stock when the forecasted volatility is extremely high appears largely profitable, suggesting a strong return-risk relationship in turbulent conditions.

Keywords: Conditional variance forecasting, Trading rules, Realised volatility, Directional change prediction

JEL Classification: C53, C32, C14

Suggested Citation

Fuertes, Ana-Maria and Kalotychou, Elena and Todorovic, Natasa, Volume, Intraday and Overnight Returns for Volatility Prediction: Profitability or Accuracy? (July 27, 2010). Review of Quantitative Finance and Accounting (Forthcoming), Available at SSRN: https://ssrn.com/abstract=1438041 or http://dx.doi.org/10.2139/ssrn.1438041

Ana-Maria Fuertes

Cass Business School, City University of London ( email )

Faculty of Finance
106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 207 477 0186 (Phone)
+44 207 477 8881 (Fax)

HOME PAGE: http://www.city.ac.uk/people/academics/ana-maria-fuertes

Elena Kalotychou

Cass Business School, City, University of London ( email )

106 Bunhill Row
London, EC1Y 8TZ
Great Britain

Natasa Todorovic (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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