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Realized volatility and overnight returns

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  • Ahoniemi, Katja

    ()
    (Aalto University School of Economics)

  • Lanne, Markku

    ()
    (University of Helsinki)

Abstract

No consensus has emerged on how to deal with overnight returns when calculating realized volatility in markets where trading does not take place 24 hours a day. This paper explores several common volatility applications, investigating how the chosen treatment of overnight returns affects the results. For example, the selection of the best volatility forecasting model depends on the way overnight returns are incorporated into realized volatility. The evidence favours weighted estimators over those that have been more commonly used in the existing literature. The definition of overnight returns is particularly challenging for the S&P 500 index, and we propose two alternative measures for its overnight return.

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File URL: http://www.suomenpankki.fi/fi/julkaisut/tutkimukset/keskustelualoitteet/Documents/1019netti.pdf
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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 19/2010.

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Length: 24 pages
Date of creation: 08 Dec 2010
Date of revision:
Handle: RePEc:hhs:bofrdp:2010_019

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Keywords: realized volatility; forecasting;

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