Forecasting Volatility with the Realized Range in the Presence of Noise and Non-Trading

27 Pages Posted: 26 Oct 2012

See all articles by Karim Bannouh

Karim Bannouh

NN Investment Partners

Martin Martens

Erasmus University Rotterdam (EUR); Robeco Asset Management

Dick J. C. van Dijk

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute; ERIM

Date Written: October 25, 2012

Abstract

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

Suggested Citation

Bannouh, Karim and Martens, Martin P.E. and van Dijk, Dick J.C., Forecasting Volatility with the Realized Range in the Presence of Noise and Non-Trading (October 25, 2012). ERIM Report Series Reference No. ERS-2012-018-F&A. Available at SSRN: https://ssrn.com/abstract=2167184

Karim Bannouh (Contact Author)

NN Investment Partners ( email )

Schenkkade 65
The Hague, 2595 AS
Netherlands

Martin P.E. Martens

Erasmus University Rotterdam (EUR) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1253 (Phone)
+31 10 408 9162 (Fax)

Robeco Asset Management ( email )

Rotterdam, 3011 AG
Netherlands

Dick J.C. Van Dijk

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute

P.O. Box 1738
3000 DR Rotterdam
Netherlands

ERIM ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1263 (Phone)
+31 10 4089162 (Fax)

HOME PAGE: http://people.few.eur.nl/djvandijk

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
111
Abstract Views
837
rank
263,481
PlumX Metrics