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The volatility of realized volatility

Author

Listed:
  • Corsi, Fulvio
  • Kretschmer, Uta
  • Mittnik, Stefan
  • Pigorsch, Christian

Abstract

Using unobservable conditional variance as measure, latent-variable approaches, such as GARCH and stochastic-volatility models, have traditionally been dominating the empirical finance literature. In recent years, with the availability of high-frequency financial market data modeling realized volatility has become a new and innovative research direction. By constructing 'observable' or realized volatility series from intraday transaction data, the use of standard time series models, such as ARFIMA models, have become a promising strategy for modeling and predicting (daily) volatility. In this paper, we show that the residuals of the commonly used time-series models for realized volatility exhibit non-Gaussianity and volatility clustering. We propose extensions to explicitly account for these properties and assess their relevance when modeling and forecasting realized volatility. In an empirical application for S&P500 index futures we show that allowing for time-varying volatility of realized volatility leads to a substantial improvement of the model's fit as well as predictive performance. Furthermore, the distributional assumption for residuals plays a crucial role in density forecasting.

Suggested Citation

  • Corsi, Fulvio & Kretschmer, Uta & Mittnik, Stefan & Pigorsch, Christian, 2005. "The volatility of realized volatility," CFS Working Paper Series 2005/33, Center for Financial Studies (CFS).
  • Handle: RePEc:zbw:cfswop:200533
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Finance; Realized Volatility; Realized Quarticity; GARCH; Normal Inverse Gaussian Distribution; Density Forecasting;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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