Predicting Realized Volatility Using High-Frequency Data, Is More Data Always Better?

A common belief in strategy design is that 'more data is better.' But is this always true? Reference [1] examined the impact of the quantity of data in predicting realized volatility. Specifically, it focused on the accuracy of volatility forecasts as a function of data sampling frequency. The study was conducted on crude oil and it used GARCH as the volatility forecast method. The author pointed out,

The cause-and-effect aspect of the relationship between sampling frequency and forecasting accuracy was assessed in-sample and out-of-sample. Regarding the in-sample assessment, I was able to find evidence that sampling frequency affected how well the model fit. The relationship in this case was that the higher the sampling frequency, the better the model fit. Regarding the out- of-sample assessment, evidence was found that sampling frequency had an effect on forecasting accuracy, albeit in a surprising way. The relationship found in this study is that increasing sampling frequency negatively affects modelling accuracy…

The results of the regression analysis showed that sampling frequency accounted for around 20- 25% of the variability in the error metrics. From the illustration of the data research method in Figure 1. it is also clear that there is an opening for the inclusion of other research fields.

In short, increasing the data sampling frequency improves in-sample prediction accuracy. However, higher sampling frequency actually decreases out-of-sample prediction accuracy.

This result is surprising, and the author provided some explanation for this counterintuitive outcome. In my opinion, financial time series are usually noisy, so using more data isn’t necessarily better because it can amplify the noise.

Another important insight from the article is the importance of performing out-of-sample testing, as the results can differ, sometimes even contradict the in-sample outcomes.

Let us know what you think in the comments below or in the discussion forum.

References

[1] Hervé N. Mugemana, Evaluating the impact of sampling frequency on volatility forecast accuracy, 2024, Inland Norway University of Applied Sciences

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