Forecasting the Realized Variance in the Presence of Intraday Periodicity

Dumitru, Ana-Maria H. and Hizmeri, Rodrigo and Izzeldin, Marwan (2024) Forecasting the Realized Variance in the Presence of Intraday Periodicity. Journal of Banking and Finance: JBF-D-21-0. ISSN 0378-4266 (In Press)

Text (Forecasting the Realized Variance in the Presence of Intraday Periodicity)
Forecasting_the_Realized_Variance_in_the_Presence_of_Intraday_Periodicity.pdf - Accepted Version
Available under License Creative Commons Attribution.
Download (2MB)

Abstract

This paper examines the impact of intraday periodicity on forecasting realized volatility using a heterogeneous autoregressive model (HAR) framework. We show that periodicity inflates the variance of the realized volatility and biases jump estimators. This combined effect adversely affects forecasting. To account for this, we propose a periodicity-adjusted HAR mod l, HARP, where predictors are constructed from the periodicity-filtered data. We demonstrate empirically (using 30 stocks from various business sectors and the SPY for the period 2000–2020) and via Monte Carlo simulations that the HARP models produce significantly better forecasts across all forecasting horizons. We also show that adjusting for periodicity when estimating the variance risk premium improves return predictability.