New Economics Papers
on Market Microstructure
Issue of 2008‒08‒21
one paper chosen by
Thanos Verousis

  1. Do high-frequency measures of volatility improve forecasts of return distributions? By John M Maheu; Thomas H McCurdy

  1. By: John M Maheu; Thomas H McCurdy
    Abstract: Many finance questions require a full characterization of the distribution of returns. We propose a bivariate model of returns and realized volatility (RV), and explore which features of that time-series model contribute to superior density forecasts over horizons of 1 to 60 days out of sample. This term structure of density forecasts is used to investigate the importance of: the intraday information embodied in the daily RV estimates; the functional form for log(RV) dynamics; the timing of information availability; and the assumed distributions of both return and log(RV) innovations. We find that a joint model of returns and volatility that features two components for log(RV) provides a good fit to S&P 500 and IBM data, and is a significant improvement over an EGARCH model estimated from daily returns.
    Keywords: RV, multiperiod, out-of-sample, term structure of density forecasts, observable SV
    JEL: C1 C50 C32 G1
    Date: 2008–08–06

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