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The predictive value of temporally disaggregated volatility: evidence from index futures markets
Author(s) -
Taylor Nicholas
Publication year - 2008
Publication title -
journal of forecasting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.543
H-Index - 59
eISSN - 1099-131X
pISSN - 0277-6693
DOI - 10.1002/for.1098
Subject(s) - volatility (finance) , futures contract , econometrics , economics , futures market , forward volatility , index (typography) , implied volatility , realized variance , volatility swap , volatility smile , financial economics , computer science , world wide web
This paper examines the benefits to forecasters of decomposing close‐to‐close return volatility into close‐to‐open (nighttime) and open‐to‐close (daytime) return volatility. Specifically, we consider whether close‐to‐close volatility forecasts based on the former type of (temporally aggregated) data are less accurate than corresponding forecasts based on the latter (temporally disaggregated) data. Results obtained from seven different US index futures markets reveal that significant increases in forecast accuracy are possible when using temporally disaggregated volatility data. This result is primarily driven by the fact that forecasts based on such data can be updated as more information becomes available (e.g., information flow from the preceding close‐to‐open/nighttime trading session). Finally, we demonstrate that the main findings of this paper are robust to the index futures market considered, the way in which return volatility is constructed, and the method used to assess forecast accuracy. Copyright © 2008 John Wiley & Sons, Ltd.