Modeling and Forecasting Realized Range Volatility

Abstract

In this paper, we estimate, model and forecast Realized Range Volatility, a new realized measure and estimator of the quadratic variation of financial prices. This estimator was early introduced in the literature and it is based on the high-low range observed at high frequency during the day. We consider the impact of the microstructure noise in high frequency data and correct our estimations, following a known procedure. Then, we model the Realized Range accounting for the well-known stylized effects present in financial data. We consider an HAR model with asymmetric effects with respect to the volatility and the return, and GARCH and GJR-GARCH specifications for the variance equation. Moreover, we also consider a non Gaussian distribution for the innovations. The analysis of the forecast performance during the different periods suggests that including the HAR components in the model improve the point forecasting accuracy while the introduction of asymmetric effects only leads to minor improvements.

Keywords: Statistical analysis of financial data, Econometrics, Forecasting methods, Time series analysis, Realized Range Volatility, Realized Volatility, Long-memory, Volatility forecasting

JEL Classification: C22, C52, C53, C58