Modeling and forecasting realized range volatility

Abstract

In this chapter, we estimate, model, and forecast Realized Range Volatility, a realized measure and estimator of the quadratic variation of financial prices. This quantity was early introduced in the literature and it is based on the high-low range observed at high frequency during the day. We consider the impact of the microstructure noise in high frequency data and correct our estimations, following a known procedure. Then, we model the Realized Range accounting for the well-known stylized effects present in financial data. We consider an HAR model with asymmetric effects with respect to the volatility and the return, and GARCH and GJR-GARCH specifications for the variance equation. Moreover, we consider a non-Gaussian distribution for the innovations. The analysis of the forecast performance during the different periods suggests that the introduction of asymmetric effects with respect to the returns and the volatility in the HAR model results in a significant improvement in the point forecasting accuracy.