Holidays,weekends and range-based volatility |
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Institution: | 1. Department of Insurance and Risk Management, College of Economics and Administrative Sciences, Al Imam Mohammad Ibn Saud Islamic University (IMSIU), P.O. Box 5701, Riyadh, Saudi Arabia;2. Finance Department, Institut Supérieur de Gestion de Gabès, Université de Gabès, BP 75, ISG Gabès, rue Jilani Al Habib, 6000 Gabès, Tunisia |
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Abstract: | This study analyses the effect of non-trading periods on the forecasting ability of S&P500 index range-based volatility models. We find that volatility significantly diminishes on the first trading day after holidays and weekends, but not after long weekends. Our findings indicate that models that include autoregressive terms that interact with dummies that allow us to capture changes in volatility levels after interrupting periods provide greater explanatory power than simple autoregressive models. Therefore, the shorter the length of the non-trading periods between two trading days, the higher the overestimation of the volatility if this effect is not considered in volatility forecasting. |
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Keywords: | Holiday effect Weekend effect Range-volatility estimators Non-trading periods Volatility forecasting C53 G17 |
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