Research Discussion Papers, Bank of Finland
No 19/2010:
Realized volatility and overnight returns
Katja Ahoniemi ()
and Markku Lanne ()
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.
Keywords: realized volatility; forecasting; (follow links to similar papers)
JEL-Codes: C14; C22; C52; (follow links to similar papers)
24 pages, December 8, 2010
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