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Does realized volatility provide additional information?

Jianfeng Zhang (Accounting and Finance Department, Xi’an University of Technology, Xi’an, China)
Wenxiu Hu (Accounting and Finance Department, Xi’an University of Technology, Xi’an, China)

International Journal of Managerial Finance

ISSN: 1743-9132

Article publication date: 22 February 2013

Abstract

Purpose

The purpose of this paper is to examine whether realized volatility can provide additional information on the volatility process to the GARCH and EGARCH model, based on the data of Chinese stock market.

Design/methodology/approach

The realized volatility is defined as the squared overnight return plus the close to open squared return of the period between the morning and afternoon session, to plus the sum of the squared f-minute returns between the trading hours during the relevant trading day. The methodology is a GARCH (EGARCH) model with added explanation variables in the variance equation. The estimation methodology is exact maximum likelihood estimation, using the BHHH algorithms for optimization.

Findings

There are some stocks for which realized volatility measures add information in the volatility process, but there are still quite a number of stocks for which they do not contain any additional information. The 30 minutes realized volatility measures outperform measures constructed on other time intervals. The firm size, turnover rate, and amplitude also partially explain the difference in realized volatility ' s explanatory power across firms.

Research limitations/implications

When analyzing the factors determining the role of realized volatility, as the difficulty of getting the data, ownership structure and ultimately ownerships are not taken into account, except for the turnover ratio, amplitude and size.

Originality/value

This study extends firstly this line of inquiry of realized volatility into the emerging Chinese stock market. Due to the unique institutional setting in China, the results of this study have played an important role on pricing warrant for domestic investors in the Chinese market.

Keywords

Acknowledgements

JEL classification – G12

The authors would like to thank the referee for their comments, which have led to a much improved paper. The authors are grateful to Xin Zhang for the valuable advice. Financial support from the National Nature Science Foundation of China and Fund of Key Disciplines at Shaanxi National Level (70973096, 5x1202) are acknowledged.

Citation

Zhang, J. and Hu, W. (2013), "Does realized volatility provide additional information?", International Journal of Managerial Finance, Vol. 9 No. 1, pp. 70-87. https://doi.org/10.1108/17439131311298539

Publisher

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Emerald Group Publishing Limited

Copyright © 2013, Emerald Group Publishing Limited