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The fine structure of volatility feedback II: overnight and intra-day effects

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  • Pierre Blanc
  • R\'emy Chicheportiche
  • Jean-Philippe Bouchaud
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    Abstract

    We decompose, within an ARCH framework, the daily volatility of stocks into overnight and intraday contributions. We find, as perhaps expected, that the overnight and intraday returns behave completely differently. For example, while past intraday returns affect equally the future intraday and overnight volatilities, past overnight returns have a weak effect on future intraday volatilities (except for the very next one) but impact substantially future overnight volatilities. The exogenous component of overnight volatilities is found to be close to zero, which means that the lion's share of overnight volatility comes from feedback effects. The residual kurtosis of returns is small for intraday returns but infinite for overnight returns. We provide a plausible interpretation for these findings, and show that our IntraDay/Overnight model significantly outperforms the standard ARCH framework based on daily returns for Out-of-Sample predictions.

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    File URL: http://arxiv.org/pdf/1309.5806
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 1309.5806.

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    Date of creation: Sep 2013
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    Publication status: Published in Physica A 402 (2014) 58-75
    Handle: RePEc:arx:papers:1309.5806

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    Web page: http://arxiv.org/

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    1. Baillie, Richard T. & Bollerslev, Tim & Mikkelsen, Hans Ole, 1996. "Fractionally integrated generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 74(1), pages 3-30, September.
    2. Sentana, Enrique, 1995. "Quadratic ARCH Models," Review of Economic Studies, Wiley Blackwell, vol. 62(4), pages 639-61, October.
    3. Giampiero M. Gallo, 2001. "Modelling the Impact of Overnight Surprises on Intra-daily Volatility," Econometrics Working Papers Archive wp2001_02, Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti".
    4. Tsiakas, Ilias, 2008. "Overnight information and stochastic volatility: A study of European and US stock exchanges," Journal of Banking & Finance, Elsevier, vol. 32(2), pages 251-268, February.
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