Intra-day periodicity and long-run volatility in short sterling futures

David G. McMillan, Alan E. H. Speight

Abstract

ABSTRACT

Research examining high-frequency financial data has suggested that volatility dynamics may be confounded by the existence of both a periodic pattern and long-memory volatility. Using five-minute sampled UK short sterling bond futures, this paper seeks to confirm the joint presence of such components. Our results provide evidence for both a U-shaped intra-day pattern and long-run dependence in volatility. Estimation of a component-Garch model confirms the presence of both long-run and short-run volatility dynamics, with half-life decay to a shock in the long-run component of 19 hours and short-run half-life decay of 37 minutes. Finally, our results suggest that taking both components into account improves the accuracy of volatility forecasts.