Document Type

Journal Article

Department/Unit

Department of Finance and Decision Sciences

Title

Forecasting volatility: Roles of sampling frequency and forecasting horizon

Language

English

Abstract

This study empirically tests how and to what extent the choice of the sampling frequency, the realized volatility (RV) measure, the forecasting horizon and the time-series model affect the quality of volatility forecasting. Using highly synchronous executable quotes retrieved from an electronic trading platform, the study avoids the influence of various market microstructure factors in measuring RV with high-frequency intraday data and in inferring implied volatility (IV) from option prices. The study shows that excluding non-trading-time volatility produces significant downward bias of RV by as much as 36%. Quality of prediction is significantly affected by the forecasting horizon and RV model, but is largely immune from the choice of sampling frequency. Consistent with prior research, IV outperforms time-series forecasts; however, the information content of historical volatility critically depends on the choice of RV measure. © 2010 Wiley Periodicals, Inc.

Publication Date

2010

Source Publication Title

Journal of Futures Markets

Volume

30

Issue

12

Start Page

1167

End Page

1191

Publisher

Wiley

DOI

10.1002/fut.20476

Link to Publisher's Edition

http://dx.doi.org/10.1002/fut.20476

ISSN (print)

02707314

ISSN (electronic)

10969934

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