Out of Sample Forecasts of Quadratic Variation

36 Pages Posted: 1 Jun 2006 Last revised: 12 Nov 2008

See all articles by Yacine Ait-Sahalia

Yacine Ait-Sahalia

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Loriano Mancini

USI Lugano - Institute of Finance; Swiss Finance Institute

Date Written: November 10, 2008

Abstract

We compare the forecasts of Quadratic Variation given by the Realized Volatility (RV) and the Two Scales Realized Volatility (TSRV) computed from high frequency data in the presence of market microstructure noise, under several different dynamics for the volatility process and assumptions on the noise. We show that TSRV largely outperforms RV, whether looking at bias, variance, RMSE or out-of-sample forecasting ability. An empirical application to all DJIA stocks confirms the simulation results.

Keywords: Market microstructure noise, high frequency data, measurement error, realized volatility, two scales realized volatility, out of sample forecasts.

JEL Classification: C14, C22, C53

Suggested Citation

Ait-Sahalia, Yacine and Mancini, Loriano, Out of Sample Forecasts of Quadratic Variation (November 10, 2008). Journal of Econometrics, Vol. 147, pp. 17-33, 2008. Available at SSRN: https://ssrn.com/abstract=905766

Yacine Ait-Sahalia (Contact Author)

Princeton University - Department of Economics ( email )

Fisher Hall
Princeton, NJ 08544
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National Bureau of Economic Research (NBER)

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Loriano Mancini

USI Lugano - Institute of Finance ( email )

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Switzerland
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HOME PAGE: http://www.people.usi.ch/mancil/

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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