Modeling conditional volatility by incorporating non-regular trading hours into the APARCH model

ABSTRACT This study aims to evaluate how the after-market and pre-opening periods affect the estimation of conditional volatility one day ahead. Volatility features quite a lot in Finance studies because it is a fundamental parameter in derivatives pricing, the efficient allocation of portfolios, and risk management. The results are relevant for investment agents to be able to refine volatility forecasting models and achieve better results in derivatives pricing, risk management, and portfolio optimization. We used the asymmetric power autoregressive conditional heteroscedasticity (APARCH) model, incorporating the after-market, pre-opening, and total overnight periods to assess whether they contain important information for modeling volatility. We analyzed the 20 stocks of Brazilian companies listed on the São Paulo Stock, Commodities, and Futures Exchange (BM&FBovespa) and also belonging to the BR Titans 20 with ADRs listed on the New York Stock Exchange and the Nasdaq. The results were evaluated in-sample using the corrected Akaike information criterion (AICc) and the statistical significance of the coefficients, and out-of-sample using root mean squared error (RMSE), mean absolut percentage error (MAPE), the R² of the Mincer-Zarnowitz regression, and the Diebold Mariano test. The analysis does not enable it to be claimed which is the best model, because there is no unanimity among all the stocks; however, non-regular trading hours were shown to incorporate important information for most of the stocks. Furthermore, the models that incorporated the pre-opening period generally obtained superior results to the models that incorporated the after-market period, demonstrating that this period contains important information for forecasting conditional volatility.

Bibliographic Details

Main Authors:	Araújo,Breno Valente Fontes, Camargos,Marcos Antônio de, Pinho,Frank Magalhães de
Format:	Digital revista
Language:	English
Published:	Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade, Departamento de Contabilidade e Atuária 2019
Online Access:	http://old.scielo.br/scielo.php?script=sci_arttext&pid=S1519-70772019000200202
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