What are returns outside trading hours capturing for volatility of individual stocks?

ABSTRACT

This study is the first to harness the negative returns and squared returns outside trading hours, trading volume and leverage effects in an augmented heterogeneous autoregressive model for forecasting volatility of individual stocks. Besides significant leverage effects and trading volume impact, we find that an increase in the negative returns is associated with a decline in volatility, but an increase in the squared returns is associated with a rise in volatility. This new finding suggests that the negative returns and squared returns outside trading hours are capturing additional leverage effects and additional volatilities, respectively. Moreover, the relations display differences amongst various firm categories which arise from firm heterogeneity.

KEYWORDS:

• Volatility
• additional leverage effects
• additional volatilities
• firm heterogeneity

JEL CLASSIFICATION:

• C1
• G1

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

The authors would like to thank the financial support provided by the research project 71320107002 of the National Natural Science Foundation of China.