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Modelling the Impact of Overnight Surprises on Intra‐daily Volatility
Author(s) -
Gallo Giampiero M.
Publication year - 2001
Publication title -
australian economic papers
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 15
eISSN - 1467-8454
pISSN - 0004-900X
DOI - 10.1111/1467-8454.00142
Subject(s) - volatility (finance) , econometrics , autoregressive conditional heteroskedasticity , surprise , economics , volatility clustering , stock (firearms) , financial economics , monetary economics , geography , psychology , social psychology , archaeology
In this paper we evaluate the impact that stock returns recorded between market closing and opening the next business day have on intra‐daily volatility. A simple test shows that the estimated volatility clustering of the intra‐daily returns may be affected by a market opening surprise bias. An extension of the standard GARCH model is suggested here to include the effect of this surprise and is applied on a sample of largely traded US stocks. The performance of two specifications in which this effect is included is evaluated in an out‐of‐sample forecasting exercise relative to their standard counterparts.