Volatility forecasting using high frequency data: The role of after-hours information and leverage effects

Abstract

This investigation extends the HAR model to include the role of after-hours information and leverage effects to forecast daily volatility of the Chinese non-ferrous metals futures market. Furthermore, volatility clustering in the residuals of the volatility model is investigated. In addition to the usual leverage effects, the findings indicated new insights into additional leverage effects, which are captured by negative overnight returns and negative lunch-break returns. Moreover, after-hours information has a highly in-sample explanatory and there is no risk–return trade-off in the Chinese non-ferrous metals futures market. One-step ahead forecasts are investigated and the results indicated that the introduction of after-hours information and leverage effects in the HAR model exhibit better predictive power. Finally, the results are robust for various sampling frequencies. Our findings have important significance for investors and policy makers and will elucidate further research directions.