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Modelling the Impact of Overnight Surprises on Intra-Daily Volatility


  • Gallo, Giampiero M


In this paper we evaluate the impact that stock returns recorded between market closing and opening the next business day have on intra-daily volatility. A simple test shows that the estimated volatility clustering of the intra-daily returns may be affected by a market opening surprise bias. An extension of the standard GARCH model is suggested here to include the effect of this surprise and is applied on a sample of largely traded US stocks. The performance of two specifications in which this effect is included is evaluated in an out-of-sample forecasting exercise relative to their standard counterparts. Copyright 2001 by Blackwell Publishers Ltd/University of Adelaide and Flinders University of South Australia

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  • Gallo, Giampiero M, 2001. "Modelling the Impact of Overnight Surprises on Intra-Daily Volatility," Australian Economic Papers, Wiley Blackwell, vol. 40(4), pages 567-580, December.
  • Handle: RePEc:bla:ausecp:v:40:y:2001:i:4:p:567-80

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    References listed on IDEAS

    1. Clark, Peter K, 1973. "A Subordinated Stochastic Process Model with Finite Variance for Speculative Prices," Econometrica, Econometric Society, vol. 41(1), pages 135-155, January.
    2. Engle, Robert F & Ng, Victor K, 1993. " Measuring and Testing the Impact of News on Volatility," Journal of Finance, American Finance Association, vol. 48(5), pages 1749-1778, December.
    3. Gallo Giampiero M. & Pacini Barbara, 1998. "Early News is Good News: The Effects of Market Opening on Market Volatility," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 2(4), pages 1-19, January.
    4. Gerety, Mason S & Mulherin, J Harold, 1994. "Price Formation on Stock Exchanges: The Evolution of Trading within the Day," Review of Financial Studies, Society for Financial Studies, vol. 7(3), pages 609-629.
    5. Romer, David, 1993. "Rational Asset-Price Movements without News," American Economic Review, American Economic Association, vol. 83(5), pages 1112-1130, December.
    6. Amihud, Yakov & Mendelson, Haim, 1987. " Trading Mechanisms and Stock Returns: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 42(3), pages 533-553, July.
    7. Stoll, Hans R & Whaley, Robert E, 1990. "Stock Market Structure and Volatility," Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 37-71.
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    Cited by:

    1. Christian T. Brownlees & Giampiero M. Gallo, 2010. "Comparison of Volatility Measures: a Risk Management Perspective," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 8(1), pages 29-56, Winter.
    2. Massimiliano Caporin & Chia-Lin Chang & Michael McAleer, 2016. "Are the S&P 500 Index and Crude Oil, Natural Gas and Ethanol Futures related for Intra-Day Data?," Tinbergen Institute Discussion Papers 16-006/III, Tinbergen Institute.
    3. Todorova, Neda & Souček, Michael, 2014. "The impact of trading volume, number of trades and overnight returns on forecasting the daily realized range," Economic Modelling, Elsevier, vol. 36(C), pages 332-340.
    4. Peter Reinhard Hansen & Asger Lunde, 2005. "A Realized Variance for the Whole Day Based on Intermittent High-Frequency Data," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 3(4), pages 525-554.
    5. Christian T. Brownlees & Giampiero Gallo, 2007. "Volatility Forecasting Using Explanatory Variables and Focused Selection Criteria," Econometrics Working Papers Archive wp2007_04, Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti".
    6. Nicholas Taylor, 2008. "The predictive value of temporally disaggregated volatility: evidence from index futures markets," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 27(8), pages 721-742.
    7. Pierre Blanc & R'emy Chicheportiche & Jean-Philippe Bouchaud, 2013. "The fine structure of volatility feedback II: overnight and intra-day effects," Papers 1309.5806,, revised May 2014.
    8. Hiroki Masuda & Takayuki Morimoto, 2009. "An Optimal Weight for Realized Variance Based on Intermittent High-Frequency Data," Global COE Hi-Stat Discussion Paper Series gd08-033, Institute of Economic Research, Hitotsubashi University.
    9. Blanc, Pierre & Chicheportiche, Rémy & Bouchaud, Jean-Philippe, 2014. "The fine structure of volatility feedback II: Overnight and intra-day effects," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 402(C), pages 58-75.
    10. Ana-Maria Fuertes & Elena Kalotychou & Natasa Todorovic, 2015. "Daily volume, intraday and overnight returns for volatility prediction: profitability or accuracy?," Review of Quantitative Finance and Accounting, Springer, vol. 45(2), pages 251-278, August.

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