Stock market volatility forecasting: Do we need high-frequency data?

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Authors

LYÓCSA Štefan MOLNÁR Peter VÝROST Tomáš

Year of publication 2021
Type Article in Periodical
Magazine / Source International Journal of Forecasting
MU Faculty or unit

Faculty of Economics and Administration

Citation
Web https://www.sciencedirect.com/science/article/pii/S0169207020301874
Doi http://dx.doi.org/10.1016/j.ijforecast.2020.12.001
Keywords Volatility; Forecasting; Realized volatility; High–low range; HAR model
Attached files
Description The general consensus in the volatility forecasting literature is that high-frequency volatility models outperform low-frequency volatility models. However, such a conclusion is reached when low-frequency volatility models are estimated from daily returns. Instead, we study this question considering daily, low-frequency volatility estimators based on open, high, low, and close daily prices. Our data sample consists of 18 stock market indices. We find that high-frequency volatility models tend to outperform low-frequency volatility models only for short-term forecasts. As the forecast horizon increases (up to one month), the difference in forecast accuracy becomes statistically indistinguishable for most market indices. To evaluate the practical implications of our results, we study a simple asset allocation problem. The results reveal that asset allocation based on high-frequency volatility model forecasts does not outperform asset allocation based on low-frequency volatility model forecasts.
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