The Volatility of Realized Volatility

Posted: 7 Jun 2006

See all articles by Fulvio Corsi

Fulvio Corsi

University of Pisa - Department of Economics; City University London

Uta Kretschmer

University of Bonn, Department of Economics

Stefan Mittnik

University of Kiel - Institute of Statistics & Econometrics; Ludwig Maximilian University of Munich - Faculty of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Christian Pigorsch

Ludwig Maximilian University of Munich - Department of Statistics

Date Written: November 28, 2005

Abstract

Using unobservable conditional variance as measure, latent-variable approaches, such as GARCH and stochastic-volatility models, have traditionally been dominating the empirical finance literature. In recent years, with the availability of high-frequency financial market data modeling realized volatility has become a new and innovative research direction. By constructing "observable" or realized volatility series from intraday transaction data, the use of standard time series models, such as ARFIMA models, have become a promising strategy for modeling and predicting (daily) volatility. In this paper, we show that the residuals of the commonly used time-series models for realized volatility exhibit non-Gaussianity and volatility clustering. We propose extensions to explicitly account for these properties and assess their relevance when modeling and forecasting realized volatility. In an empirical application for S&P500 index futures we show that allowing for time-varying volatility of realized volatility leads to a substantial improvement of the model's fit as well as predictive performance. Furthermore, the distributional assumption for residuals plays a crucial role in density forecasting.

Keywords: Finance, Realized Volatility, Realized Quarticity, GARCH, Normal Inverse

JEL Classification: C22, C51, C52, C53

Suggested Citation

Corsi, Fulvio and Kretschmer, Uta and Mittnik, Stefan and Pigorsch, Christian, The Volatility of Realized Volatility (November 28, 2005). CFS Working Paper No. 2005/33. Available at SSRN: https://ssrn.com/abstract=906807

Fulvio Corsi (Contact Author)

University of Pisa - Department of Economics ( email )

via Ridolfi 10
I-56100 Pisa, PI 56100
Italy

HOME PAGE: http://people.unipi.it/fulvio_corsi/

City University London ( email )

Northampton Square
London, EC1V OHB
United Kingdom

Uta Kretschmer

University of Bonn, Department of Economics ( email )

Postfach 2220
D-53113 Bonn
Germany

Stefan Mittnik

University of Kiel - Institute of Statistics & Econometrics ( email )

Olshausenstr. 40
Kiel, Schleswig-Holstein 24118
Germany

Ludwig Maximilian University of Munich - Faculty of Economics ( email )

Akademiestr.1/III
Munich, D-80539
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Christian Pigorsch

Ludwig Maximilian University of Munich - Department of Statistics ( email )

Ludwigstr. 33
Munchen, D-80539
Germany

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