Measuring volatility with the realized range

Abstract

Realized variance, being the summation of squared intra-day returns,has quickly gained popularity as a measure of daily volatility.Following Parkinson (1980) we replace each squared intra-day returnby the high-low range for that period to create a novel and moreefficient estimator called the realized range. In addition wesuggest a bias-correction procedure to account for the effects ofmicrostructure frictions based upon scaling the realized range withthe average level of the daily range. Simulation experimentsdemonstrate that for plausible levels of non-trading and bid-askbounce the realized range has a lower mean squared error than therealized variance, including variants thereof that are robust tomicrostructure noise. Empirical analysis of the S&P500index-futures and the S&P100 constituents confirm the potential ofthe realized range.realized volatility;bias-correction;high-frequency data;high-low range;market microstructure noise