| Abstract: | This study proposes a new approach to the estimation of daily realised volatility in financial markets from intraday data. Initially, an examination of intraday returns on S&P 500 Index Futures reveals that returns can be characterised by heteroscedasticity and time-varying autocorrelation. After reviewing a number of daily realised volatility estimators cited in the literature, it is concluded that these estimators are based upon a number of restrictive assumptions in regard to the data generating process for intraday returns. We use a weak set of assumptions about the data generating process for intraday returns, including transaction returns, given in den Haan and Levin den Haan, W.J., Levin, A., 1996. Inferences from parametric and non-parametric covariance matrix estimation procedures, Working paper, NBER, 195.], which allows for heteroscedasticity and time-varying autocorrelation in intraday returns. These assumptions allow the VARHAC estimator to be employed in the estimation of daily realised volatility. An empirical analysis of the VARHAC daily volatility estimator employing intraday transaction returns concludes that this estimator performs well in comparison to other estimators cited in the literature. |
