Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2019-07-31
Number: 19-052/IV
Author-Name: Anne Opschoor
Author-Workplace-Name: Vrije Universiteit Amsterdam
Author-Name: André Lucas
Author-Workplace-Name: Vrije Universiteit Amsterdam
Title: Observation-driven Models for Realized Variances and Overnight Returns
Abstract: We present a new model to decompose total daily return volatility into a filtered (high-frequency based) open-to-close volatility and a time-varying scaling factor. We use score-driven dynamics based on fat-tailed distributions to limit the impact of incidental large observations. Applying our new model to 100 stocks of the S&P 500 during the period 2001-2014 and evaluating (in-sample and out-of-sample) in terms of Value-at-Risk and Expected Shortfall, we find our model outperforms alternatives like the HEAVY model that uses close-to-close returns and realized variances, and models treating close-to-open en open-to-close returns as separate processes. Results also indicate that the ratio between total and open-to-close volatility changes substantially through time, especially for financial stocks.
Classification-JEL: C32, C58
Keywords: overnight volatility, realized variance, F distribution, score-driven dynamics
File-URL: https://papers.tinbergen.nl/19052.pdf
File-Format: application/pdf
File-Size: 602092 bytes
Handle: RePEc:tin:wpaper:20190052