Article

Intraday Periodicity Journal of Emerging Market Finance

16(1) 1–28

and Volatility © 2017 Institute for Financial

Management and Research
SAGE Publications
Forecasting: Evidence sagepub.in/home.nav
DOI: 10.1177/0972652716686207
from Indian Crude Oil http://emf.sagepub.com

Futures Market

B.B. Chakrabarti1
Vivek Rajvanshi2

Abstract
We estimate intraday periodicities in return volatility by implementing
two time series procedures—flexible Fourier form and cubic spline. We
use intraday data for more than five years for crude oil futures contracts
traded at the Multi Commodity Exchange India Limited. Filtration of the
intraday periodicities from the raw returns reveals long-run depend-
ence in volatility. We observe the presence of recurring and consistent
intraday patterns in return volatility. Further, we find that adjustment
for the intraday periodicity in return volatility improves forecasting
performance. Our results are robust after controlling for the scheduled
macroeconomic announcements.

JEL Classification: C14, C22, G10

Keywords
Cubic spline, FFF, crude oil futures, high frequency, volatility forecasting

1
Professor, Indian Institute of Management Calcutta, Joka, Kolkata, WB, India.
2
Assistant Professor, Indian Institute of Management Calcutta, Joka, Kolkata, WB, India.

Corresponding author:
Vivek Rajvanshi, Assistant Professor at Indian Institute of Management Calcutta, Joka,
Diamond Harbour Road, Kolkata-700104, WB, India.
E-mails: vivekrajvanshi@gmail.com; vivekr@iimcal.ac.in
2 Journal of Emerging Market Finance 16(1)

1. Introduction
Existence of consistent and recurring intraday patterns in return volatility
across global markets and financial instruments has been widely docu-
mented in finance literature, particularly, U-shaped patterns in volatility
during the trading day has attracted a great deal of attention from research-
ers (for example, see Abhyankar, Ghosh, Levin, & Limmack, 1997; Cai,
Hudson, R., & Keasey, 2004; Daigler, 1997; Ekman, 1992; Harris, 1986;
Wood, McInish, & Ord, 1985). Andersen and Bollerslev (1997) showed
that the presence of intraday periodic patterns induce distortions in volatil-
ity estimation process. Therefore, volatility prediction without adjusting
intraday periodicity may be misleading. The number of higher observa-
tions in high frequency data than daily data, compared to the identifiable
shocks, potentially provides a more accurate forecast of return volatility
(McMillian & Speight, 2004).
Time series procedures— Fourier flexible form (FFF) and cubic spline
are very successful in estimating intraday periodicities in return volatility
(Andersen, Bollerslev & Cai, 2000; McMillan & Speight, 2010). Andersen
and Bollerslev (1997) suggest a sequential estimation or ‘two-step proce-
dure’ for the adjustment of intraday periodicities in volatility modelling.
In the first step—we obtain filtered returns by removing the deterministic
periodicity components from the raw returns and then in the second
step—volatility models are applied on the filtered returns. Cai et al. (2000)
use the FFF to estimate the intraday periodicities for gold futures
contracts traded at COMEX, a division of NYMEX. They conclude that
an adjustment for the intraday periodicities is necessary to study the
characteristics of intraday volatility. Andersen, Bollerslev and Cai (2000)
and Bollerslev, Cai and Song (2000) find long memory dependence after
the filtration of intraday periodicities in return volatility for the Nikkei
225 index and US Treasury bond futures.
Engle and Russell (1998) implement the cubic spline approach to
estimate the time-adjusted duration in autoregressive conditional dura-
tion (ACD) models for irregularly spaced tick data. This approach fits
three-degree polynomials between the pre-specified knots fixed at the
points where changes in intraday patterns are expected. Taylor (2004b)
and Giot (2005) implement the cubic spline approach in an ACD frame-
work for the FTSE-100 index futures and stocks traded on the NYSE.
Evans and Speight (2010) applied both FFF and cubic spline approaches
to study the effect of calendar and macroeconomic announcements on intra-
day periodicities for Euro-Dollar, Euro-Sterling, and Euro-Yen exchange
rates. They find that calendar and macroeconomic announcements have
Chakrabarti and Rajvanshi 3

an impact of intraday periodicities. However, they do not find any

economic significance from those announcements.
The characteristics of intraday periodicities in return volatility and
accurate volatility forecasting are very useful for market participants
such as day traders, algorithmic traders, high-frequency portfolio man-
agers, scalpers, and hedgers, since they need to evaluate the risk involved
in their portfolios more frequently than long-term investors. This study
provides an extensive analysis of intraday patterns in return volatility for
crude oil futures contracts, which is the most liquid futures contract
traded at the Multi Commodity Exchange of India Ltd (MCX). During
the year 2010, approximately 78,257 contracts were traded daily. We
used 10-minute interval data spanning more than five years from June
2005 to December 2010. Studies on Indian commodity futures market
are rare, although it is a one of the fastest-growing emerging markets.
Since the inception of the national commodity exchanges in 2003, the
commodity futures market in India has witnessed a rapid growth in vol-
ume. Trading volume (in terms of value of trade) in all the exchanges
during 2010–11 was approximately US$2.5 trillion. Details about the
commodity contracts trading in Indian market has been provided in
Table 1.Within six years of its inception, the MCX became the fourth
largest derivatives exchange in Asia. According to the 2010 Volume
Survey Report 2010 of Futures Industry Association, Washington, US,
the MCX is the sixth largest commodities exchange in the world in terms
of the number of traded contracts during April 2009 to March 2010.
This study extends the extant finance literature in many ways. First, it
analyses oil futures contracts traded in the Indian commodity market
which is an emerging market and is unexplored in this econometric
framework. Second, the extensive analysis of intraday periodicity in
return volatility is mainly limited to foreign exchange rate markets
and market indices. Commodity futures markets are still unexplored
though it is required to test the robustness of the results obtained in other
markets. Third, we employed two alternative techniques—FFF and
cubic spline, to capture and test the importance of intraday periodicities
in volatility modelling.
We find the presence of intraday periodicities in the return volatility.
Our results suggest that the filtration of deterministic intraday periodici-
ties reveals long-run dependence property in volatility. Our findings sug-
gest that an adjustment for the intraday periodicity in return volatility
results in improved volatility estimates and volatility forecasting.
The remainder of this paper is structured as follows: Section 2
describes the data and provides statistical analysis of intraday periodicity
4 Journal of Emerging Market Finance 16(1)

Table 1. Most Liquid Commodities Traded in National Exchanges

Year of Contract Value in

S. No. Commodity Exchange Start Expiration Month billion US$ % Share *
A Precious
Metals
1 Gold MCX 2003 2,4,6,8,10,12 402.9 30.07
2 Silver MCX 2003 3,5,7,9,12 239.3 17.86
B Basic Metals
1 Copper MCX 2003 2,4,6,8,11 189.4 14.13
2 Nickel MCX 2004 1,2,……..11,12 57.7 4.31
3 Zinc MCX 2006 1,2,……..11,12 54.5 4.07
C Energy
1 Crude oil MCX 2004 1,2,……..11,12 255.5 19.07
2 Natural gas MCX 2006 1,2,……..11,12 67.6 5.04
D Agriculture
1 Guar seed NCDEX 2003 1,2,……..11,12 54.1 28.12
2 Soya oil NCDEX 2001 1,2,……..11,12 28.6 14.89
3 Channa NCDEX 2004 1,2,……..11,12 22.3 11.58
4 Soya bean NCDEX 2003 1,2,……..11,12 20.7 10.78
5 Rape mustard NCDEX 1999 1,2,……..11,12 17.8 9.24
6 seed NCDEX 1956 1,2,……..11,12 16.8 8.71
7 Turmeric NCDEX 2005 1,2,……..11,12 7.1 3.67
8 Jeera NMCE 2001 1,2,……..11,12 5.6 10.64
Sacking
Source: Author’s estimates.
Notes: Financial Year 2009–10 may be considered as the reference year for Table.
*%Share of commodity as per value of trade in the corresponding exchange
during the FY 2009–10. Contract of expiration month is given in column 5,
where 1 stands for January, ‘2’ denotes February and so on.

and the correlation structure of intraday returns and volatility. Section 3

discusses the methodology for estimating and the adjustment procedure
for intraday periodicities in the volatility model. Estimates of intraday
periodicities and volatility forecast are discussed in Section 4 and finally,
Section 5 concludes the study.

2.  Sample Period and Preliminary Analysis

We obtained intraday proprietary data at 10-minute intervals for the near-
est to maturity months, from the exchange for crude oil futures contracts
from June 2005 to December 2010, which provides data of 1,375 days for
65 contracts. The data are composed of the best bid price/quantity, best
Chakrabarti and Rajvanshi 5

ask price/quantity, open and the last traded price for each time interval
for the nearest month to expiration contracts.
The Press Information Bureau, India, provides data for macro-
economic announcements with the time stamp near to minute. The data
set covers press releases about the estimates of the monthly industrial
production index, monthly export and import, the weekly wholesale
price index, monthly oil and natural gas production, and announcements
of Bond and T-bill auctions. They also report on actions taken by the
central bank related to the monetary policy such as change in repo rates,
reverse repo rate, bank rates, etc.
MCX provides a trading window from 10:00 am to 11:30 pm from
Monday to Friday and from 10:00 am to 02:00 pm on Saturdays. However,
the trading volume on Saturdays is quite lower than normal day’s
volume. For some days, data were not available after 11:00 pm. We have
considered data for weekdays traded between 10:00 am to 11:00 pm only.
In one day, this produces 78 ten-minute intervals for analysis. Returns
are computed as the difference in the logarithm of mid-quotes.
JK ^bid t, n + ask t, nh NO
KK OO
KK 2 OO
R t, n = log K
KK ^bid t, n - 1 + ask t, n - 1h OOO
KK OO
L 2 P
Rt,n is the return for nth 10-minute interval on the day t, t= 1, 2, … T. T
denotes the trading days and n=1, 2, … N denotes the number of intervals
during the day t.
Descriptive statistics for the 10-minute returns show that returns are
not different from zero (–0.0000171). Ten-minute returns show the pres-
ence of fat tails and high peak as the skewness comes to be –0.348 and
kurtosis 18.731. Jarque-Bera statistics show that the returns are not
normal.

2.1.  Identification of Intraday Periodicities

In order to identify the intraday patterns in return volatility, we draw
(Figure 1) the average of 10-minute returns and absolute returns across all
intervals. We use absolute return as the proxy for return volatility. Pagan
and Schwert (1990) among others, pointed out that absolute return reduces
the influence of heavy tails and occasional shocks, which is in accordance
with the literature (e.g., see Evans &Speight, 2010).1
Return volatility is high at the opening then it declines sharply and
again starts rising around 1:00 pm with a high steep around 8:00 pm and
Figure 1. Average Returns and Absolute Returns.
Source: Author’s estimates.
Chakrabarti and Rajvanshi 7

then declines till the market closes. A sudden rise and spike in return
volatility around 6:00 pm (12:30 GMT) may be from the contagion effect2
of US commodity markets as trading in the NYMEX, a leading exchange
for crude oil in US, starts at around 12:00 GMT. Regularly scheduled
macroeconomic announcements in the US are announced at 12:30 GMT,
which may influence the Indian commodity futures markets. Decline in
return volatility from 10:00 pm until market closing may be due to low
business activities during this time as banks, local precious metals
markets and other spot markets are closed.
Further, to characterize intraday periodicity in return volatility, we
plotted a day-correlogram, which is shown in Figure 2.

1.2.  One-day Correlogram for Raw and Absolute Returns

The correlogram for 10-minute returns (left panels) in Figure 2 does not
show any discernible patterns and violates the 95% confidence interval
band at several lags, but it does not suggest any particular order for the
return process. The day-correlogram for return volatility (right panel)
shows a spike at first lag, declines sharply for higher lags and again
starts rising until the end creating a distorted U shape. If these patterns
are consistent across all the days, it may cause distortion in the long-run
persistence of return volatility.
Several studies such as Poshakwale (1996), Murry and Zhu (2004),
and Nath and Dalvi (2005) find a day-of-the-week effect in returns and
return volatility. To be more conclusive and to capture the day-of-the-
week effect, we plotted a 5-day correlogram.

1.3.  Five-day Correlogram for 10-minute Absolute Returns

Figure 3 shows a correlogram for weekdays, that is, from Monday
to Friday. The autocorrelation patterns in the correlogram show the
presence of cyclical patterns in return volatility indicating the presence of
deterministic intraday patterns in return volatility. The 5-day correlogram
shows a small rise instead of decay in autocorrelations for Fridays. An
increase in autocorrelations on Friday indicates the presence of a day-of-
the-week effect. These results confirm the patterns observed in previous
studies on foreign exchange markets (e.g., Andersen & Bollerslev, 1997,
1998; Bollerslev et al., 2000; Andersen et al., 2000).
Figure 2. Day-correlogram for the Returns and Absolute Returns.
Source: Author’s estimates.
Chakrabarti and Rajvanshi 9

Figure 3. Five-day Correlogram for the Absolute Returns.

Source: Author’s estimates.

2. Methodology
2.1.  Modeling Intraday Periodicity
From earlier studies by Wood et al. (1985), Ekman (1992) and Daigler
(1997), periodicity in return, volatility is estimated as the average of
return volatility across the trading days. In this study, we estimate intraday
periodicity in return volatility by using two time series approaches—FFF
and cubic spline. The advantage of the time series procedures such as FFF
and cubic spline is that they use complete time series data in estimating
the desired model and provides estimates that are more reliable.
2.1.1.  Flexible Fourier Form
Andersen and Bollerslev (1998) pointed out that the volatility process
can be assumed to be driven by the calendar effect, macroeconomic news
announcement effect and volatility persistent factor. Intraday returns can
be decomposed as

R t, n = E (R t, n) + v t, n ) s t, n ) Z t, n (1)

where Rt,n is the intraday return for the nth interval on day t. is the price
of the asset at the end of nth interval on day t. E(Rt,n) denotes the expected
return of nth interval on day t. N is the number of time intervals per day.
σt,n is the remaining long memory volatility component for the nth interval
on day t. St,n denotes the intraday periodicity component which includes
the calendar effect and macroeconomic announcement effects observed
during the nth interval on day t. Zt,n is an i.i.d error term with a mean of
zero and unit variance that is assumed to be independent from the daily
volatility process.
10 Journal of Emerging Market Finance 16(1)

The components of equation (1) are not separately identifiable. Using

the logarithm and rearranging the terms, we get

xt t, n / 2 log|R t, n - E (R t, n)| - log v 2t, n = 2 log s t, n + log Z 2t, n, (2)

E(Rt,n)may be approximated with the average of intraday returns across

trading days, whereas v 2t, ncan be estimated by using the daily conditional
variance of v 2t, n = v 2t /N , where N is the total number of intervals on tth
day. xt t, ncan be estimated through the following regression:
n n
xt t, n = | Jj = 0 v tj ;n oj + n 1j + n 2j + | iD= 0 m ij I n = di +
N1 N2
 (3)
| ip=1 c c ij cos 2 rN in + d ij sin 2 rN in mE
where P denotes the tuning parameter and refers to the order of expansion.
P is chosen based on the information criteria such as Akike information
criterion and Bayesian information criterion. N1 = (N+1)/2 and N2 = (N+1)
(N+2)/2 are normalizing constants. Each of J+1 FFF are parameterized
with the non-linear components in n (n coefficients) and the number of
sinusoids (γ and δ coefficients). J>0 allows the possible interaction between
daily return volatility and periodic components. mij is the coefficient
corresponding to dummies which may be introduced in the time interval
during a day, corresponds to calendar events or news announcements.
The value of J is determined on the basis of the best fit of the intraday
periodic component, information criteria and the parsimony of the model.
Intraday periodic component is estimated as follows:
\
x t, n
T # exp e o
2
s t, n = . (4)
\
x t, n
| |
T o N e
2
t =1 n =1

The filtered return series is obtained by normalizing the returns with the
estimated periodic component as
R t, n
R t, n =
[
. (5)
s t, n

2.1.2.  Cubic Spline

Although the FFF method provides a parsimonious model, but it is not
flexible in its functional form and assumes equality at the starting and
closing of the periodic cycle (Taylor, 2004a). On the other hand, cubic
Chakrabarti and Rajvanshi 11

spline allows for sharp peaks and troughs observed in a time series (Evans
& Speight, 2010)
In the cubic spline approach, intraday periodicity patterns are obtained
by fitting a three-degree polynomial between the predefined points
called ‘knots’. Knots are positioned in such a way so as it can capture
the complexities in intraday periodicities, for example, knots may be
positioned at the opening and closing of dominant markets to capture the
opening and closing effects of those markets. Following Evans and
Speight (2010), operational regression equation to estimate the intraday
periodicity component can be written as
J
n n D
xt t, n = | v tj [n 0, j + n 1, j + n 2, j + | m ij I i (t, n) +
j=0 N1 N2 i =1
 (6)
n - li n-l 2 n-l 3
| d a 1, i D i d N n + a 2, i D i d N i n + a 3, i D i d N i n n],
P

i =1

where N1 = (N+1)/2 and N2 = (N+1) (N+2)/2 are normalizing constants.

li denotes the interval during the day in which ith knot (i=1,2,…,P) is
placed. Di’s are dummy variables assigned the value one if li > n, otherwise
zero. N is the number of intervals during the trading day. a1,i, a2,i, a3,i are
the coefficients to be estimated. Ii(t,n) is the dummy variable taking the
value of 1 for any calendar effect that occurs on day t and macroeconomic
announcements that occurs at the nth interval on the tth day.
We employ five knots during the trading hours in order to capture the
deterministic periodicity component. The first knot is positioned corre-
sponding to the opening of the Indian commodity market at 10:00 am.
The second knot is positioned at 11:30 am when the European markets
open.3 The third knot is positioned at 4:00 pm to capture the impact of
closing the Indian equity and bond markets. The fourth knot is posi-
tioned at 5:30 pm to capture the impact of the opening of US markets4 and
finally we position a knot at around 8:00 pm to capture the impact of
the closing/slowing down of business activities as banks and financial
institutions close most of their business activities at around this time.

2.2.  Volatility Models

Nelson (1991) proposed an exponential-GARCH (EGARCH) model
where conditional variance is a function of past residuals and conditional
variance. Nelson assumed that the errors follow a generalized error
distribution (GED). He also pointed out that the use of GED improves
the estimates of models in the presence of high kurtosis and fat-tails,
12 Journal of Emerging Market Finance 16(1)

which are the stylized facts of the return series. The conditional variance
equation of the EGARCH model can be expressed as

ft -1 |f t - 1|
+ a> r H . (7)
2
log (v 2t ) = ~ + b log (v 2t - 1) + c -
(v 2
t -1) ^v 2
t -1 h

The EGARCH model has several advantages over the GARCH models.
First, there is no need to impose restrictions to ensure non-negativity in
the parameters since it always provides a positive conditional variance
(Brooks, 2008). Second, the asymmetric effect or leverage effect, that
is, higher volatility levels observed following the negative shocks as
compared to positive shocks, can be tested through this model. Haniff
and Pok (2010) pointed out that EGARCH produced superior results
compared to other GARCH and threshold GARCH (TGARCH) models.
In this study, we have implemented two approaches—a sequential estima-
tion approach and PGARCH models augmented with the FFF and cubic
spline for volatility forecasting.
2.2.1.  Sequential Estimation Approach
Andersen and Bollerslev (1997) proposed a ‘sequential estimation
approach’ or ‘two-step method’ by making use of the FFF to estimate
the conditional volatility. In the first step, which is the filtration of raw
returns, the periodicity component is estimated and removed from the raw
returns. In the second step, filtered returns are modelled with conventional
volatility models, like GARCH and readjusted for periodicity. We make
use of FFF and cubic spline to estimate the intraday periodicities in return
volatility and to get filtered returns.
2.2.2.  Periodic Models
Bollerslev and Ghysels (1996) proposed periodic-GARCH (PGARCH)
allow the time dependency and periodicity in the conditional variance
terms of GARCH model. Variance equation for the PGARCH model can
be expressed as
v t2 = ~ s (t) + a s (t) f 2t - 1 + b s (t), (8)
where s(t) denotes the stage of the periodic cycle. Within periodic cycles,
a periodic model allows the coefficients in the variance equation to take a
different value in each period where the change in volatility is expected.
One way to do this is with the inclusion of a set of dummy variables. Taylor
(2004a) mentioned that, ‘these models are computationally expensive and
are required to estimate a large number of parameters if there are many
time periods within the periodic cycle’.
Chakrabarti and Rajvanshi 13

Haniff and Pok (2010) used a periodic version for the EGARCH
models and found that EGARCH models provide a better fit than the
GARCH and TGARCH models. The FFF and cubic spline versions of
the PGARCH models are discussed in the following two sections:
2.2.2.1.  Periodic EGARCH Models with FFF
The intraday periodic component can be introduced in the variance
equation of Bollerslev and Ghysels’ (1996) periodic models without
complicating the volatility estimation process (Haniff & Pok, 2010;
Taylor, 2004a). The conditional variance equation in this framework can
be expressed as

ft -1
log (v 2t ) = ~l Ft + b log (v 2t - 1) + c
(v 2t - 1)

|f t - 1|
+ a> r H,
2
- (9)
(v 2t - 1)

where Ftl= [1, f1,l t, ......, f jl, t, ....., f j,l t]

2r js (t) 2r js (t)
and f j,l t = sin c m + cos c m, (10)
N N
je (1, 2, … J) denotes the intraday periodic cycle which may be chosen on
the basis of the information criteria. N is the number of intervals during
the trading day. S (t) denotes the tth interval.5
2.2.2.2. Periodic EGARCH Models with Cubic Spline
The conditional volatility equation of cubic spline version of the periodic
model in the EGARCH framework can be expressed as

ft -1 |f t - 1|
+ a> r H, (11)
2
  log (v t2) = ~l G t + b log (v t2- 1) + c -
(v 2t - 1) v 2t - 1

where Glt = [1, g1,l t, ..., g lj, t, ..., g lj, t]

and g lj, t

n - lm n - lm 2 n - lm 3
  = | <a 1, m D m d n + a 2, m D m d n + a 3, m D m d n F, (12)
M

m =1 N N N
14 Journal of Emerging Market Finance 16(1)

where lm denotes the interval of the day in which knot m (m=1,2, …, M)

is placed, the knots are chosen by a priori-based criteria on the underly-
ing intraday pattern in volatility or according to the expected change in
intraday return volatility.6

2.3.  Model Adequacy and Forecasting Performance

We determine the best model among the all five fitted models by compar-
ing the in-sample model-fit and out-of-sample forecasting performance.7
For the in-sample fit, we use three criteria: log likelihood (LL), Akaike
information criterion (AIC) and Bayesian information criterion (BIC).
The model which produces the maximum LL and minimum AIC and BIC
among the competing models is considered best.
Accurate forecasting of the return volatility is important given its
application in risk management and asset pricing. The model that
provides forecasts of return volatility nearest to the realized volatility is
considered the best. We compared all five models with the realized vola-
tility. We considered absolute returns as a measure of realized volatility
since it is less affected with the outliers. These outliers occur occasionally
and they cannot be assumed repetitive over time (Martens, Chang, &
Taylor, 2002).
We use several performance measures to ensure the robustness of the
results. First, we compare the correlation between realized volatility and
forecasted volatility. Second, we compare the mean forecast with the
average forecast in the forecasted period. Third, we compare the mean
absolute error (MAE) for all the models. The model that produces the
minimum MAE is considered the best forecasting model. The MAE for
N*T forecasts can be expressed as

MAE =
1
N)T
| Tt =1 | nN=1 |R n, t | - \
v n, t

where \
v n, t is the estimated volatility for nth interval on day t, n=1,2, …,
N and t=1, 2, … T. |Rn,t| is the realized volatility.
Fourth, we estimate the root mean squared forecast error (RMSE), the
N*T forecasts RMSE is given as

RMSE =
1
N)T
| Tt =1 | nN=1 $ (| R n, t | - \
v n, t) 2 .

Finally, we compare the model-based forecasts by using Diebold and

Mariano’s (1995) asymptotic test. The Diebold and Mariano test provides
Chakrabarti and Rajvanshi 15

a measure of predictive accuracy for two competing predictions for a

given loss function, by comparing them with the actual time series (we use
the MAE as the loss function). This test verifies the null hypothesis that
forecasts if two competing models are equally accurate. The advantage
of the Diebold and Mariano test is that it provides robust results in case
of non-normal and serially correlated forecasts errors (Taylor, 2004a).

3.  Results and Discussion

3.1.  Estimation of Intraday Periodicities

Economic theories do not provide any theoretical prediction about the
intraday periodicities. While modelling intraday periodicities using FFF,
the choice of the number of sinusoids is important. We choose appropri-
ate models based on information criteria such as the AICs and BICs. We
compare the information criteria for intraday periodicities estimated by
FFF and explained in a regression equation (3) in conjunction with equa-
tion (2) for different values of P from a grid (1 to 10) and for J=0.8 For
models with J=1, the model cannot be applied directly for forecasting
intraday volatility since the future daily return also needs to be estimated.
We ignore the interaction between daily return volatility and intraday
periodicity for the parsimony of the model.9
Figure 4 shows the intraday patterns in absolute returns estimated
by using the FFF (left panel) and cubic spline (right panel) approach.
It is apparent that both FFF and cubic spline provides a close fit over aver-
age intraday periodicity patterns. Table 2 provides the estimate of FFF
and cubic spline coefficients, the calendar effect and macroeconomic
announcements.10 A high F-statistic indicates the presence of recurring and
consistent patterns in volatility. The adjusted R-squares obtained by the
cubic spline (0.107) method is higher than the FFF (0.099), which indi-
cates that cubic spline provides a better fit for the intraday periodicities.
Figure 5 shows the 5-day correlogram for raw absolute returns |Rt,n|
(left panels) and filtered absolute returns | R t, n | /[
s t, n (right panels), where
[
s t, n denotes the normalized estimate for deterministic periodic compo-
nent estimated by using FFF11 whereas Figure 6 shows the 5-day corre-
logram for the raw returns and filtered returns obtained by using cubic
spline approach. The implied hyperbolic decay (j2d–1) patterns are also
shown in the correlogram for the raw and filtered returns in Figures 5
and 6.
Figure 4. Fitted Intraday Periodicities in absolute Returns
Source: Author’s estimates.
Chakrabarti and Rajvanshi 17

Table 2. Estimated Coefficients by Using FFF and Cubic Spline

Coefficients FFF Coefficients CS

m11 –0.731*** a11 –46.74***
d11 0.071*** a21 1284.97***
m21 –0.466*** a31 –8578.10***
d21 –0.180*** a12 9.50***
m31 –0.164*** a22 –38.31***
d31 0.094*** a32 33.15***
a13 –6.05***
a23 53.00
a33 –199.01
a14 –4.82**
a24 83.16**
a34 –380.91*
a15 –0.78
a25 –65.44***
a35 208.85***
Macroeconomic announcement Effect
Government 0.008 –0.05
auction 0.22 0.22
Export import 0.198 0.13
Index of industrial 0.035 –0.01
production 0.103 0.07
Monetary policy 0.108 0.08
Quarterly GDP 0.757*** 0.66***
T-Bills yield 0.252 0.21
Wholesale price
index
Oil & natural gas
production
N 107,250 107,250
F-Stat 619.33 429.552
Adj. R-Sq 0.099 0.108
Source: Author’s estimates.
Notes: The table reports the estimated coefficients with the p value for equation (2),
using equations (3) and (6) as FFF and cubic spline specifications for the intraday
periodicities. For the brevity of space, we have not reported the coefficients
of the weekdays. Returns are estimated from 10-minute logarithmic bid-ask
quotes from June 2005 to December 2010.
Figure 5. Five-day Correlogram with the Predicted Hyperbolic Decay for the Raw and Filtered Absolute Returns (FFF)
Source: Author’s estimates.
Figure 6. Five-day Correlogram with the Predicted Hyperbolic Decay for the Raw and Filtered Absolute Returns (Cubic Spline)
Source: Author’s estimates.
20 Journal of Emerging Market Finance 16(1)

The correlogram for the raw returns (left panels) shows the presence
of strong cyclical patterns. These cyclical patterns almost disappeared in
the correlogram for filtered returns (right panels). The correlogram for
filtered returns (right panels) shows that the 5-day correlogram is very
close to the theoretical hyperbolic decaying patterns indicating that high-
frequency returns exhibit high volatility persistence.
The filtration of high-frequency absolute returns determined by using
FFF and cubic spline reveal interesting characteristics. After the adjust-
ments for intraday periodicities, a long memory feature in the intraday
return process emerges as an inherent feature of the return process. This
reflects the importance of intraday periodicities in revealing the true
characteristics of the returns. Furthermore, it is also important to test if
the removal of intraday periodicities in return volatility results in a
consistent parameter estimation of the conditional volatility models.

3.2.  Estimation of Volatility Persistence

The presence of strictly positive autocorrelations and hyperbolic declin-
ing patterns in the correlation allow for estimating the degree of volatility
persistence or the parameter of fractional integration (denoted by ‘d’).
The relationship between autocorrelations tj, of a long-memory process
for large lags j, can be expressed as tj ≈ cj2d–1 where c denotes the factor
of proportionality (Bollerslev et al., 2000). The operational regression
equation to estimate the fractional integration parameter is

log (t j) . log (c) + (2d - 1) log (j).

Estimates of the fractional integration parameter are between (–0.5, 0.5)

which shows that returns are neither stationary I (0) nor of order I (1). The
value of the parameter of fractional integration d’s comes out to be 0.475.

3.3.  Out-of-Sample Forecast

The estimated coefficients associated with non-periodic (M1), sequen-
tial models (M2 and M3) and periodic models (M4 and M5) are used to
generate 10-minute return volatility forecasts for all the intervals during
a trading day. Table 3 reports the estimated coefficients of FFF and cubic
spline for the in-sample period.Intraday and interday periodicities in
volatility estimated for the in-sample period are assumed consistent for
the out-of-sample period.
Table 3. In-sample Fit

Raw Return Filtered Returns Periodic GARCH

GARCH (M1) FFF (M2) CS (M3) FFF (M4) CS (M5)
Description Coeff. P Value Coeff. P Value Coeff. P Value Coeff. P Value Coeff. P Value
~ –0.564 0.000 –0.087 0.000 –0.095 0.000 –1.369 0.000 –1.388 0.000
a 0.457 0.000 0.099 0.000 0.105 0.000 0.105 0.000 0.104 0.000
b 0.934 0.000 0.996 0.000 0.995 0.000 0.996 0.000 0.996 0.000
c –0.014 0.000 –0.01 0.000 –0.01 0.000 –0.01 0.000 –0.01 0.000
m11 –0.035 0.002
d11 0.085 0.000
m11 0.06 0.000
d21 0.01 0.907
m31 0.014 0.000
d31 0.015 0.000
a11 –2.44 0.605
a21 132.84 0.205
a31 –1020.22 0.081
a12 –0.47 0.320
a22 –3.33 0.253
a32 10.62 0.036
a13 –4.06 0.004
a23 49.21 0.032
(Table 3 continued)
(Table 3 continued)
Raw Return Filtered Returns Periodic GARCH
GARCH (M1) FFF (M2) CS (M3) FFF (M4) CS (M5)
Description Coeff. P Value Coeff. P Value Coeff. P Value Coeff. P Value Coeff. P Value
a33 –104.61 0.317
a14 4.4 0.012
a24 –64.88 0.017
a34 305.97 0.011
a15 3.52 0.017
a25 –35.27 0.012
a35 121.85 0.003
LL 50421.09 51098.05 51598.01 4461.833 54655.63
AIC –0.9474 –0.9060 –0.9149 0.2047 –1.0267
BIC –0.9455 –0.9041 –0.9130 –1.0262 –1.0233
Source: Author’s estimates.
Notes: The table reports the estimated coefficients with the p value for equation (7) for the raw returns, using equation (7) with filtered returns
estimated by using equation (4), and by equations (9) and (11). FFF and cubic spline specifications for the intraday periodicities. For the brevity
of space, we have not reported the coefficients of the weekdays. Returns are estimated from 10-minute logarithmic bid-ask quotes from June
2005 to December 2010.
Chakrabarti and Rajvanshi 23

The EGARCH (1,1) parameters for each model (M1 to M5) are re-
estimated after each trading day (i.e., after 78, 10-minute intervals) using
a rolling window of one year which constitutes around 250 days, starting
from July 1, 2009 to June 30, 2010. The volatility forecast for 100 days
starting from July 1, 2010 has been forecasted. This generates 7,800
forecasts.
The relative performances of all the models are compared by using
four measures, which include correlation between forecasted volatility
and realized volatility, mean forecast, MAE and root mean squared error
(RMSE). We also make use of the asymptotic test proposed by Diebold
and Mariano (1995). Table 4 reports the outcome of the mean forecast,
correlation with the realized volatility, MAE and RMSE.
The non-periodic EGARCH model as evidenced by MAE, RMSE
provide the worst out-of-sample forecasts compared to the sequential
and periodic models. Forecasts obtained by the sequential estimation
approach, particularly the cubic spline version (M3), is far better than the

Table 4. Out-of-sample Forecasting Performance

Sequential Approach PGARCH

GARCH FFF Cubic Spline FFF Cubic Spline
(M1) (M2) (M3) (M4) (M5)
Correlation with 0.254 0.322 0.337 0.342 0.339
realized volatility
[R(t,n)]
Mean forecast 0.143 0.149 0.148 0.145 0.146
(realized: 0.0963)
Mean absolute 0.086 0.088 0.086 0.084 0.085
error
Root mean 0.108 0.113 0.111 0.108 0.109
squared error
Source: Author’s estimates.
Notes: The table reports the out-of-sample errors associated with the volatility
forecast for the 10-minute volatility for the five models M1 to M5. 100 days
prediction is made for the 10-minute volatility forecast by using a rolling window
of one year. Model M1 is estimated for raw returns through EGARCH(1,1)
discussed in equation (7). Models M2 and M3 are estimated by using sequential
estimation approach, where in the first step, returns are filtered from the
intraday periodicities by using FFF discussed in equations (5) in conjunction with
equations (2) to (4) and cubic spline given in equation (6). In the second step
filtered returns are used to forecast volatility with the EGARCH (1,1). Models
M4 and M5 provide the volatility forecast based on the FFF and cubic spline
version of PGARCH model provided in equations from (9) to (12).
24 Journal of Emerging Market Finance 16(1)

non-periodic model (M1), since the correlation between the estimated

volatility and realized volatility increases from 0.25 to 0.33. The periodic
models (M4 and M5) even perform marginally better than the sequential
models (M2 and M3). The FFF version of the periodic model (M4)
produces a minimum MAE and RMSE. However, the MAE and RMSE
are very close across the models; therefore, to conclude which model is
better, we need to test the statistical significance of difference between
the MAE produced by the different models. Finally, we employ the
Diebold and Mariano asymptotic test and to compare the forecasting per-
formance of all the five competing models, where MAE is considered as
the loss function. The main advantage of the Diebold and Mariano test is
that it is robust enough to account for serially correlated and non-
normally distributed errors (Taylor, 2004a). The results obtained from
the Diebold–Mariano test are given in Table 5 with the corresponding
level of significance (p values). It is apparent that the FFF and cubic

Table 5. Diebold and Mariano Test to Measure Relative Forecasting Performance

(M1) (M2) (M3) (M4) (M5)

M1 – 0.0021 0.0008 –0.0014 –0.0008
– (0.0190) (0.4101) (0.0693) (0.3561)
M2 –0.0021 – –0.0013 –0.0035 –0.0029
(0.0000) – (0.0000) (0.0000) (0.0000)
M3 –0.0008 0.0013 – –0.0022 –0.0016
(0.0000) (0.0000) – (0.0000) (0.0000)
M4 0.0014 0.0035 0.0022 – 0.0006
(0.0000) (0.0000) (0.0000) – (0.0013)
M5 0.0008 0.0029 0.0016 –0.0006 –
(0.0000) (0.0000) (0.0000) (0.0013) –
Source: Author’s estimates.
Notes: Table reports the Diebold and Mariano test statistics for all pair-wise combinations
of five models estimated. In model M1 forecast is predicted by using EGARCH
(1,1) for the raw returns. M2 and M3 are the FFF and cubic spline version
of the sequential estimation approach discussed in equations (2) to (6). Model
M4 and M5 are the FFF and cubic spline version of the PGARCH given in
equations from (9) to (12). For the comparison of the predictive accuracy of
the two competing models, mean absolute error is taken as a loss function
with respect to the realized volatility. Difference in the average loss is reported
in the cross cell of the models and p values are given in the parentheses. For
example, corresponding to model M2 and other models M*, difference in the
corresponding loss function is reported in respective cells (M*–M2). Positive
and significant values of the difference show that the model given in row is
better than those given in corresponding column. Cell at the intersection of
the first row and the second column provides that model M1 provides better
forecasting performance than model M2 at less than 2% level of significance.
Chakrabarti and Rajvanshi 25

spline versions of the PGARCH model outperform the non-periodic

(M1) models and sequential models (M2 & M3).

4. Conclusions
In this study, we have provided an extensive analysis of intraday perio-
dicities in volatility by using intraday data for crude oil futures contracts
traded at MCX, a leading commodity exchange in India. We implemented
a FFF and cubic spline approach to estimate the intraday periodicity. Our
findings suggest the presence of a deterministic and consistent intraday
periodicity has strong impact on the characteristics of high-frequency
returns. Filtration of the raw returns reveals the long memory property
of volatility.
Further, we examined whether an adjustment for interday and intra-
day periodicities in commodity futures improve out-of-sample forecasts.
We compared the forecasting performance of two versions of Andersen
and Bollerslev’s (1997) sequential estimation models and two versions
of Bollerslev and Ghysels’ (1996) periodic models with the EGARCH
model. In order to arrive at the best model, we compared the forecasting
performance of all five competing models by using four performance
measures—correlation between forecasted volatility with realized vola-
tility, mean forecast, MAE, RMSE, and the Diebold–Mariano test. Our
findings show that the PGARCH model is marginally better than sequen-
tial estimation models. Our results are robust after controlling for time to
maturity, seasonality, and macroeconomic announcements. Our findings
have implications for portfolio management.

Acknowledgments
The authors are grateful to MCX, in particular V. Shunmugam for the data and
Arindam Ghosh for explaining the data and the workings of the futures market
to us. The contents of the paper including the conclusions do not reflect the
opinions of MCX or any of its officers, employees, or associates. The authors are
solely responsible for any error.

Notes
  1. We also used other measures of volatility such as Parkinson’s measure of
volatility and Garman Klass measure of volatility. These measures also show
similar volatility patterns. For brevity of space, we have shown volatility
patterns estimated as average of absolute returns across the trading days only.
  2. King and Wadhwani (1990) proposed “contagion model” to explain the intra-
day behavior of the stocks, which states that the trading in one market has
26 Journal of Emerging Market Finance 16(1)

impact on the other related market as the investors draw inferences from the
one market about the price behavior. This model predicts that after closing of
the primary market, there must be a drop in the volatility of the other market.
  3. London Metal Exchange (LME) opens around 6:00 GMT, which is a leading
commodity exchange for basic metals.
  4. NYMEX opens around 12:00 GMT, which is a leading commodity market for
the crude oil and precious metals.
  5. Numbers of sinusoids chosen are same as used in the sequential estimation
approach.
  6. We positioned knots in the same way as placed for the sequential estimation
method.
  7. Five models, one (M1) for the raw returns, two models (M2 & M3) for the fil-
tered returns (after adjusting for the intraday periodicity component estimated
by implemented FFF and cubic spline approach), two models (M4 and M5)
corresponding to the FFF and cubic spline version of the PGARCH models
have been estimated. We name model M1 as non-periodic model, M2 and M3
as sequential models (FFF and cubic spline) and M4 and M5 as periodic mod-
els (FFF and cubic spline).
  8. J=0 means that there is no interaction between the intraday periodicity and
daily volatility while J=1 means it is.
  9. Andersen and Bollerslev (1997) mentioned that ignoring interaction with the
daily volatility has very little effect on the periodicity estimation.
10. Corresponding to regression equations (3) and (6) in conjunction with equation
(2).
11. Details of the obtaining estimate for the deterministic periodic component are
given in equations (1)–(3).

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