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Economic gains of realized volatility in the Brazilian stock market

Author

Listed:
  • Márcio Gomes Pinto Garcia

    () (PUC/Rio)

  • Marcelo Cunha Medeiros

    () (IPEA)

  • Francisco Eduardo de Luna e Almeida Santos

    ()

Abstract

This paper evaluates the economic gains associated with following a volatility timing strategy based on a multivariate model of realized volatility. To study this issue, we build a high frequency database with the most actively traded Brazilian stocks. Comparing with traditional volatility methods, we find that, when estimation risk is controlled, economic gains associated with realized measures perform well and increase proportionally to the target return. When expected returns are bootstrapped, however, performance fees are not significant, which is an indication that economic gains of realized volatility are offset by estimation risk.

Suggested Citation

  • Márcio Gomes Pinto Garcia & Marcelo Cunha Medeiros & Francisco Eduardo de Luna e Almeida Santos, 2014. "Economic gains of realized volatility in the Brazilian stock market," Brazilian Review of Finance, Brazilian Society of Finance, vol. 12(3), pages 319-349.
  • Handle: RePEc:brf:journl:v:12:y:2014:i:3:p:319-349
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    More about this item

    Keywords

    Realized volatility; utility; forecasting;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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