Overnight Stock Returns and Realized Volatility

27 Pages Posted: 19 Oct 2011 Last revised: 26 Mar 2013

See all articles by Katja Ahoniemi

Katja Ahoniemi

Imperial College Business School

Markku Lanne

University of Helsinki - Department of Political and Economic Studies

Date Written: March 19, 2013


The information flow in modern financial markets is continuous, but major stock exchanges are open for trading for only a limited number of hours. No consensus has emerged on how to deal with overnight returns when calculating and forecasting realized volatility in markets where trading does not take place 24 hours a day. Based on a recently introduced formal testing procedure, we find that for the S&P 500 index, a realized volatility estimator that optimally incorporates overnight information is more accurate in-sample. In contrast, estimators that do not incorporate overnight information are more accurate for individual stocks. We also show that accounting for overnight returns may a ffect the conclusions drawn in an out-of-sample horserace of forecasting models. Finally, there is considerably less variation in the selection of the best out-of-sample forecasting model when only the most accurate in-sample RV estimators are considered.

Suggested Citation

Ahoniemi, Katja and Lanne, Markku, Overnight Stock Returns and Realized Volatility (March 19, 2013). International Journal of Forecasting, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1945687 or http://dx.doi.org/10.2139/ssrn.1945687

Katja Ahoniemi (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
London, SW7 2AZ
United Kingdom

Markku Lanne

University of Helsinki - Department of Political and Economic Studies ( email )

P.O. Box 54
FIN-00014 Helsinki
+358-9-191 24626 (Phone)
+358-9-191 24780 (Fax)

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