Realized GARCH: A Joint Model of Returns and Realized Measures of Volatility
31 Pages Posted: 10 Jan 2010 Last revised: 16 Apr 2014
Date Written: October 31, 2010
We introduce a new framework, Realized GARCH, for the joint modeling of returns and realized measures of volatility. A key feature is a measurement equation that relates the realized measure to the conditional variance of returns. The measurement equation facilitates a simple modeling of the dependence between returns and future volatility. Realized GARCH models with a linear or log-linear specification have many attractive features. They are parsimonious, simple to estimate, and imply an ARMA structure for the conditional variance and the realized measure. An empirical application with DJIA stocks and an exchange traded index fund shows that a simple Realized GARCH structure leads to substantial improvements in the empirical fit over standard GARCH models.
Keywords: High Frequency Data, Realized Variance, Leverage Effect
JEL Classification: C10, C22, C80
Suggested Citation: Suggested Citation