Analysis of the predictive ability of information accumulated over nights, weekends and holidays
Recent empirical evidence suggests that the weekend and holiday calendar effects are much stronger and statistically significant in volatility as opposed to expected returns. This paper seeks an explanation for this empirical finding by undertaking a comprehensive investigation of the predictive ability of information accumulated over nights, weekends and holidays for a series of global indices. We study this form of seasonal heteroscedasticity by employing a generalized stochastic volatility model, in which the conditional daily volatility is measured in calendar time from open-to-close of the market, and depends on lagged close-to-open returns. We conduct a series of empirical tests and conclude that the information accumulated over weekends and especially holidays is a predictor of subsequent daily volatility. The SV parameters are estimated by implementing a Bayesian MCMC algorithm, which is adjusted for sampling the seasonal volatility level effects. We compute in-sample and out-of-sample density forecasts for assessing the adequacy of the conditional distribution. We also use Bayes factors as a likelihood-based framework for evaluating the SV specifications. Bayes factors account for both estimation and model risk. We conclude by computing volatility forecasts relevant for risk management
|Date of creation:||11 Aug 2004|
|Date of revision:|
|Contact details of provider:|| Phone: 1 212 998 3820|
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Michael K Pitt & Neil Shephard, . "Filtering via simulation: auxiliary particle filters," Economics Papers 1997-W13, Economics Group, Nuffield College, University of Oxford.
- Geweke, John, 1989. "Bayesian Inference in Econometric Models Using Monte Carlo Integration," Econometrica, Econometric Society, vol. 57(6), pages 1317-39, November.
- Ilias Tsiakas, 2004.
"Periodic Stochastic Volatility and Fat Tails,"
wp04-09, Warwick Business School, Finance Group.
- Bollerslev, T. & Ghysels, E., 1994.
"Periodic Autoregressive Conditional Heteroskedasticity,"
Cahiers de recherche
9408, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
- Bollerslev, Tim & Ghysels, Eric, 1996. "Periodic Autoregressive Conditional Heteroscedasticity," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(2), pages 139-51, April.
- Bollerslev, T. & Ghysels, E., 1994. "Periodic Autoregressive Conditional Heteroskedasticity," Cahiers de recherche 9408, Universite de Montreal, Departement de sciences economiques.
- John F. Geweke, 1991. "Evaluating the accuracy of sampling-based approaches to the calculation of posterior moments," Staff Report 148, Federal Reserve Bank of Minneapolis.
- Chib, Siddhartha & Nardari, Federico & Shephard, Neil, 2002. "Markov chain Monte Carlo methods for stochastic volatility models," Journal of Econometrics, Elsevier, vol. 108(2), pages 281-316, June.
- Jacquier, Eric & Polson, Nicholas G & Rossi, Peter E, 1994.
"Bayesian Analysis of Stochastic Volatility Models,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 12(4), pages 371-89, October.
- Tom Doan, . "RATS programs to replicate Jacquier, Polson, Rossi (1994) stochastic volatility," Statistical Software Components RTZ00105, Boston College Department of Economics.
- Sandmann, Gleb & Koopman, Siem Jan, 1998. "Estimation of stochastic volatility models via Monte Carlo maximum likelihood," Journal of Econometrics, Elsevier, vol. 87(2), pages 271-301, September.
- Josef Lakonishok, Seymour Smidt, 1988. "Are Seasonal Anomalies Real? A Ninety-Year Perspective," Review of Financial Studies, Society for Financial Studies, vol. 1(4), pages 403-425.
- Sangjoon Kim & Neil Shephard & Siddhartha Chib, 1998. "Stochastic Volatility: Likelihood Inference and Comparison with ARCH Models," Review of Economic Studies, Oxford University Press, vol. 65(3), pages 361-393.
- Jeff Fleming & Chris Kirby, 2003. "A Closer Look at the Relation between GARCH and Stochastic Autoregressive Volatility," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 1(3), pages 365-419.
When requesting a correction, please mention this item's handle: RePEc:ecm:ausm04:208. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.