The Effect of Non-Trading Days on Volatility Forecasts in Equity Markets

Forthcoming, Finance Research Letters

19 Pages Posted: 15 Jul 2017  

Stefan Lyocsa

University of Economics in Bratislava - Faculty of Business Economics

Peter Molnár

University of Stavanger

Date Written: July 8, 2017

Abstract

Weekends and holidays lead to gaps in daily financial data. Standard models ignore these irregularities. Because this issue is particularly important for persistent time series, we focus on volatility modelling, specifically modelling of realized volatility. We suggest a simple way of adjusting volatility models, which we illustrate on an AR(1) model and the HAR model of Corsi (2009). We investigate daily series of realized volatilities for 21 equity indices around the world, covering more than 15 years, and we find that our extension improves the volatility models—both in sample and out of sample. For HAR models and for consecutive trading days, the mean squared error decreased by 2.34% in average and for the QLIKE loss function by 1.41%.

Keywords: realized volatility, volatility forecasting, non-trading days

JEL Classification: C53, Q02, G17

Suggested Citation

Lyocsa, Stefan and Molnár, Peter, The Effect of Non-Trading Days on Volatility Forecasts in Equity Markets (July 8, 2017). Forthcoming, Finance Research Letters . Available at SSRN: https://ssrn.com/abstract=2998989

Stefan Lyocsa

University of Economics in Bratislava - Faculty of Business Economics ( email )

Tajovskeho 13
Kosice, 04130
Slovakia

Peter Molnár (Contact Author)

University of Stavanger ( email )

UiS Business School
Stavanger, 4036
Norway

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