Measuring volatility with the realized range

Realized variance, being the summation of squared intra-day returns, has quickly gained popularity as a measure of daily volatility. Following Parkinson [1980. The extreme value method for estimating the variance of the rate of return. Journal of Business 53, 61-65] we replace each squared intra-day return by the high-low range for that period to create a novel and more efficient estimator called the realized range. In addition, we suggest a bias-correction procedure to account for the effects of microstructure frictions based upon scaling the realized range with the average level of the daily range. Simulation experiments demonstrate that for plausible levels of non-trading and bid-ask bounce the realized range has a lower mean-squared error than the realized variance, including variants thereof that are robust to microstructure noise. Empirical analysis of the S&P500 index-futures and the S&P100 constituents confirms the potential of the realized range.