Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/205342 
Year of Publication: 
2019
Series/Report no.: 
Tinbergen Institute Discussion Paper No. TI 2019-052/IV
Publisher: 
Tinbergen Institute, Amsterdam and Rotterdam
Abstract: 
We present a new model to decompose total daily return volatility into a filtered (high-frequency based) open-to-close volatility and a time-varying scaling factor. We use score-driven dynamics based on fat-tailed distributions to limit the impact of incidental large observations. Applying our new model to 100 stocks of the S&P 500 during the period 2001-2014 and evaluating (in-sample and out-of-sample) in terms of Value-at-Risk and Expected Shortfall, we find our model outperforms alternatives like the HEAVY model that uses close-to-close returns and realized variances, and models treating close-to-open en open-to-close returns as separate processes. Results also indicate that the ratio between total and open-to-close volatility changes substantially through time, especially for financial stocks.
Subjects: 
overnight volatility
realized variance
F distribution
score-driven dynamics
JEL: 
C32
C58
Document Type: 
Working Paper

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