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Modelling and Forecasting Noisy Realized Volatility

Modelling and forecasting noisy realized volatility
Authors: Manabu Asai; Michael McAleer; Marcelo C. Medeiros;

Modelling and Forecasting Noisy Realized Volatility

Abstract

Several methods have recently been proposed in the ultra high frequency financial literature to remove the effects of microstructure noise and to obtain consistent estimates of the integrated volatility (IV) as a measure of ex-post daily volatility. Even bias-corrected and consistent realized volatility (RV) estimates of IV can contain residual microstructure noise and other measurement errors. Such noise is called “realized volatility error”. As such errors are ignored, we need to take account of them in estimating and forecasting IV. This paper investigates through Monte Carlo simulations the effects of RV errors on estimating and forecasting IV with RV data. It is found that: (i) neglecting RV errors can lead to serious bias in estimators; (ii) the effects of RV errors on one-step ahead forecasts are minor when consistent estimators are used and when the number of intraday observations is large; and (iii) even the partially corrected 2R recently proposed in the literature should be fully corrected for evaluating forecasts. This paper proposes a full correction of 2 R . An empirical example for S&P 500 data is used to demonstrate the techniques developed in the paper.

Countries
Japan, Netherlands, Spain
Keywords

Applications of statistics to actuarial sciences and financial mathematics, model evaluation, 330, goodness-of-fit, Realized volatility; diffusion; financial econometrics; measurement errors; forecasting; model evaluation; goodness-of-fit, forecasting, diffusion, financial econometrics, forecasting, goodness-of-fit, measurement errors, model evaluation, realized volatility, realized volatility; diffusion; financial econometrics; measurement errors; forecasting; model evaluation; goodness-of-fit., Diffusion, realized volatility, Measurement errors, Goodness-of-fit., 5302 Econometría, Econometría (Economía), EUR ESE 31, Model evaluation, Statistical methods; risk measures, diffusion, Finanzas, financial econometrics, Financial econometrics, Econometría, measurement errors, Realized volatility, Forecasting, jel: jel:C22, jel: jel:C53, jel: jel:G32, jel: jel:G11, jel: jel:G17

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    selected citations
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    This is an alternative to the "Influence" indicator, which also reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).
    37
    popularity
    This indicator reflects the "current" impact/attention (the "hype") of an article in the research community at large, based on the underlying citation network.
    Top 10%
    influence
    This indicator reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).
    Top 10%
    impulse
    This indicator reflects the initial momentum of an article directly after its publication, based on the underlying citation network.
    Average
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selected citations
These citations are derived from selected sources.
This is an alternative to the "Influence" indicator, which also reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).
BIP!Citations provided by BIP!
popularity
This indicator reflects the "current" impact/attention (the "hype") of an article in the research community at large, based on the underlying citation network.
BIP!Popularity provided by BIP!
influence
This indicator reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).
BIP!Influence provided by BIP!
impulse
This indicator reflects the initial momentum of an article directly after its publication, based on the underlying citation network.
BIP!Impulse provided by BIP!
37
Top 10%
Top 10%
Average
Green
bronze