Volatility Proxies for Discrete Time Models

de Vilder, Robin G. and Visser, Marcel P. (2007): Volatility Proxies for Discrete Time Models.

Abstract

Discrete time volatility models typically employ a latent scale factor to represent volatility. High frequency data may be used to construct proxies for these scale factors. Examples are the intraday high-low range and the realized volatility. This paper develops a method for ranking and optimizing volatility proxies. It is possible to outperform the quadratic variation as a proxy for the discrete time scale factor. For the S&P 500 index data over the years 1988-2006 this is achieved by a proxy which puts, among other things, more weight on the highs than on the lows over intraday intervals.

• Item Type: MPRA Paper
• Institution: Korteweg-de Vries Instute for Mathematics, University of Amsterdam
• Language: English
• Keywords: volatility proxy; realized volatility; quadratic variation; scale factor; arch/garch/stochastic volatility; intraday seasonality
• Subjects: C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C65 - Miscellaneous Mathematical Tools; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C52 - Model Evaluation, Validation, and Selection; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes