Time-varying variance and skewness in realized volatility measures

Abstract

We propose new empirical models to capture the dynamics of the variance and skewness in realized volatility measures. We find that time-variation in variance and skewness of realized measures is a key empirical feature, even after accounting for well- known stylized facts of realized measures such as long-memory-type persistence and incidental large observations. Using a broad range of 89 U.S. stocks across different sectors over the period 2001-2019, we show that these phenomena are not incidental phenomena of a few stocks, but are widely shared. Accounting for dynamics in the variance and skewness of realized measures results in significantly better in-sample fit and out-of-sample unconditional density and quantile forecasts.

Keywords: realized kernel, heavy tails, F distribution, time-varying shape-parameter, Vol-of-Vol, score-driven dynamics

JEL Classification: C32, C58