Volatility Estimation and Forecasts Based on Price Durations

Young Hong, Seok; Nolte, Ingmar; Taylor, Stephen J; Zhao, Xiaolu

Abstract

We investigate price duration variance estimators that have long been neglected in the literature. In particular, we consider simple-to-construct non-parametric duration estimators, and parametric price duration estimators using autoregressive conditional duration specifications. This paper shows i) how price duration estimators can be used for the estimation and forecasting of the integrated variance of an underlying semi-martingale price process and ii) how they are affected by discrete and irregular spacing of observations, market microstructure noise and finite price jumps. Specifically , we contribute to the literature by constructing the asymptotic theory for the non-parametric estimator with and without the presence of bid/ask spread and time discreteness. Further, we provide guidance about how our estimators can best be implemented in practice by appropriately selecting a threshold parameter that defines a price duration event, or by averaging over a range of non-parametric duration esti-mators. We also provide simulation and forecasting evidence that price duration esti-mators can extract relevant information from high-frequency data better and produce more accurate forecasts than competing realized volatility and option-implied variance estimators, when considered in isolation or as part of a forecasting combination setting.

Citation

Young Hong, S., Nolte, I., Taylor, S. J., & Zhao, X. (2023). Volatility Estimation and Forecasts Based on Price Durations. Journal of Financial Econometrics, 21(1), 106-144. https://doi.org/10.1093/jjfinec/nbab006

• Journal Article Type: Article
• Acceptance Date: Feb 8, 2021
• Online Publication Date: Mar 1, 2021
• Publication Date: 2023-01
• Deposit Date: Mar 28, 2024
• Publicly Available Date: Apr 10, 2024
• Journal: Journal of Financial Econometrics
• Print ISSN: 1479-8409
• Electronic ISSN: 1479-8417
• Publisher: Oxford University Press
• Peer Reviewed: Peer Reviewed
• Volume: 21
• Issue: 1
• Pages: 106-144
• DOI: https://doi.org/10.1093/jjfinec/nbab006
• Keywords: Economics and Econometrics; Finance
• Public URL: https://nottingham-repository.worktribe.com/output/33024282
• Publisher URL: https://academic.oup.com/jfec/article-abstract/21/1/106/6155899?redirectedFrom=fulltext
• Additional Information: This is a pre-copyedited, author-produced version of an article accepted for publication in Journal of Financial Econometrics following peer review. The version of record Seok Young Hong, Ingmar Nolte, Stephen J Taylor, Xiaolu Zhao, Volatility Estimation and Forecasts Based on Price Durations, Journal of Financial Econometrics, Volume 21, Issue 1, Winter 2023, Pages 106–144, is available online at: https://doi.org/10.1093/jjfinec/nbab006