Forecasting Volatility with the Realized Range in the Presence of Noise and Non-Trading
27 Pages Posted: 26 Oct 2012
Date Written: October 25, 2012
We introduce a heuristic bias-adjustment for the transaction price-based realized range estimator of daily volatility in the presence of bid-ask bounce and non-trading. The adjustment is an extension of the estimator proposed in Christensen et al. (2009). We relax the assumption that all intra-day high (low) transaction prices are at the ask (bid) quote. Using data-based simulations we obtain estimates of the probability that a given intraday range is (upward or downward) biased or not, which we use for a more refined bias-adjustment of the realized range estimator. Both Monte Carlo simulations and an empirical application involving a liquid and a relatively illiquid S&P500 constituent demonstrate that ex post measures and ex ante forecasts based on the heuristically adjusted realized range compare favorably to existing bias-adjusted (two time scales) realized range and (two time scales) realized variance estimators.
Keywords: forecasting, high frequency data, market microstructure noise, realized range, two time scales, realized variance
JEL Classification: G17, C53, %s
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