On the Forecasting Power of Intraday Volatility, Volatility Transmission across Markets and Regime Switches in Volatility

In this short paper we try to systematically address and answer some question arising in the daily practice of hedge fund risk management. Nowadays several intraday measures of risk are available to the risk manager, but the informativeness of these higher frequency statistics is not yet completely clear. Does intraday volatility (or single events like intraday volatility “spikes”) have any forecasting power for security prices or future daily volatility? Does risk transmit into other markets, and if yes only at an intraday or also at lower observation frequencies? This last issue can be highly relevant for example for portfolio hedging issues. Moreover, volatility seems to be strongly mean reverting, in the sense that as volatility decreases in absolute terms, the likelihood of a jump in volatility seems to increase. How can we statistically test widespread feeling about the market and possibly use this information for trading and risk management? High frequency stock market, FX and fixed income data tend to be very noisy and even academic research remains fairly mixed on the issue of the informativeness of high frequency information. In what follows we try to give some preliminary answers to these and other questions