Overnight News and Daily Equity Trading Risk Limits

29 Pages Posted: 23 May 2012 Last revised: 10 Jan 2015

See all articles by Katja Ahoniemi

Katja Ahoniemi

Imperial College Business School

Ana-Maria Fuertes

Cass Business School, City University of London

Jose Olmo

Universidad de Zaragoza; University of Southampton

Date Written: May 21, 2012

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.

Keywords: Overnight, Price discovery, Realized volatility, Risk management, Value-at-Risk

JEL Classification: C52, C53, G15

Suggested Citation

Ahoniemi, Katja and Fuertes, Ana-Maria and Olmo, Jose, Overnight News and Daily Equity Trading Risk Limits (May 21, 2012). Available at SSRN: https://ssrn.com/abstract=2065017 or http://dx.doi.org/10.2139/ssrn.2065017

Katja Ahoniemi

Imperial College Business School ( email )

South Kensington Campus
London, SW7 2AZ
United Kingdom

Ana-Maria Fuertes (Contact Author)

Cass Business School, City University of London ( email )

Faculty of Finance
106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 207 477 0186 (Phone)
+44 207 477 8881 (Fax)

HOME PAGE: http://www.city.ac.uk/people/academics/ana-maria-fuertes

Jose Olmo

Universidad de Zaragoza ( email )

Gran Via, 2
50005 Zaragoza, Zaragoza 50005
Spain

University of Southampton ( email )

Southampton
United Kingdom

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