This paper explores the volatility forecasting implications of a model in which the friction in high-frequency prices is related to the true underlying volatility. The contribution of this paper is to propose a framework under which the realized variance may improve volatility forecasting if the...

Volatility in stock markets evokes varying responses from market participants. While some perceive it as opportunity to make money, others perceive it as a threat and start unwinding their positions. In today's globalized environment, increased volatility reflects not only the domestic...