Realized GARCH: A Joint Model of Returns and Realized Measures of Volatility

31 Pages Posted: 10 Jan 2010 Last revised: 16 Apr 2014

See all articles by Peter Reinhard Hansen

Peter Reinhard Hansen

University of North Carolina (UNC) at Chapel Hill - Department of Economics; Copenhagen Business School, Finance; Aarhus University - CREATES

Zhuo Huang

National School of Development, Peking University

Howard Howan Stephen Shek

Stanford University

Date Written: October 31, 2010

Abstract

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

Hansen, Peter Reinhard and Huang, Zhuo and Shek, Howard Howan Stephen, Realized GARCH: A Joint Model of Returns and Realized Measures of Volatility (October 31, 2010). Available at SSRN: https://ssrn.com/abstract=1533475 or http://dx.doi.org/10.2139/ssrn.1533475

Peter Reinhard Hansen (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

Chapel Hill, NC 27599
United States

HOME PAGE: http://https://sites.google.com/site/peterreinhardhansen/

Copenhagen Business School, Finance ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Aarhus University - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Zhuo Huang

National School of Development, Peking University ( email )

No. 38 Xueyuan Road
Haidian District
Beijing, Beijing 100871
China

Howard Howan Stephen Shek

Stanford University ( email )

Stanford, CA 94305
United States

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