Overnight news and daily equity trading risk limits
Overnight news and daily equity trading risk limits
This paper proposes a new bivariate modeling approach for setting daily equity-trading risk limits using high-frequency data. We construct one-day-ahead Value-at-Risk (VaR) forecasts by taking into account the different dynamics of the overnight and daytime return processes and their covariance. The covariance is motivated by market microstructure effects such as price staleness and news spillover. Among the competitors we include a simpler bivariate model where the overnight return is redefined by moving the open price further into the trading day, and a univariate model based on the close-to-close return and an overnight-adjusted realized volatility. We illustrate the different approaches using data on the S&P 500 and Russell 2000 indices. The evidence in favour of modeling the covariance is more convincing for the latter index due to the lower trading volumes and, relatedly, the less efficient price discovery at market open for small-cap stocks.
overnight, price discovery, realized volatility, risk management, value-at-risk
1-27
Ahoniemi, K.
26caf4ab-5468-4b5f-8947-1112c5d4bbbb
Fuertes, A.-M.
fa47c7a7-1299-402d-9c9d-523a9b9aa634
Olmo, J.
706f68c8-f991-4959-8245-6657a591056e
Ahoniemi, K.
26caf4ab-5468-4b5f-8947-1112c5d4bbbb
Fuertes, A.-M.
fa47c7a7-1299-402d-9c9d-523a9b9aa634
Olmo, J.
706f68c8-f991-4959-8245-6657a591056e
Ahoniemi, K., Fuertes, A.-M. and Olmo, J.
(2015)
Overnight news and daily equity trading risk limits.
Journal of Financial Econometrics, 13 (1), .
(doi:10.1093/jjfinec/nbu032).
Abstract
This paper proposes a new bivariate modeling approach for setting daily equity-trading risk limits using high-frequency data. We construct one-day-ahead Value-at-Risk (VaR) forecasts by taking into account the different dynamics of the overnight and daytime return processes and their covariance. The covariance is motivated by market microstructure effects such as price staleness and news spillover. Among the competitors we include a simpler bivariate model where the overnight return is redefined by moving the open price further into the trading day, and a univariate model based on the close-to-close return and an overnight-adjusted realized volatility. We illustrate the different approaches using data on the S&P 500 and Russell 2000 indices. The evidence in favour of modeling the covariance is more convincing for the latter index due to the lower trading volumes and, relatedly, the less efficient price discovery at market open for small-cap stocks.
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Accepted/In Press date: 23 December 2014
e-pub ahead of print date: 13 February 2015
Keywords:
overnight, price discovery, realized volatility, risk management, value-at-risk
Organisations:
Economics
Identifiers
Local EPrints ID: 376503
URI: http://eprints.soton.ac.uk/id/eprint/376503
ISSN: 1479-8409
PURE UUID: d14ded1d-cd41-4551-9206-5126f4fc0c78
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Date deposited: 29 Apr 2015 15:26
Last modified: 15 Mar 2024 03:46
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Contributors
Author:
K. Ahoniemi
Author:
A.-M. Fuertes
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