RSS
 

Modeling and Forecasting Realized Volatility

30 Jan 2012

Article by: Torben G. Andersen, Tim Bollerslev, Francis X. Diebold and Paul Labys
Published by: University of Pennsylvania
Date: 2002

“We provide a general framework for integration of high-frequency intraday data into the measurement,
modeling, and forecasting of daily and lower frequency return volatilities and return distributions. Most
procedures for modeling and forecasting financial asset return volatilities, correlations, and distributions
rely on potentially restrictive and complicated parametric multivariate ARCH or stochastic volatility
models. Use of realized volatility constructed from high-frequency intraday returns, in contrast, permits
the use of traditional time-series methods for modeling and forecasting. Building on the theory of
continuous-time arbitrage-free price processes and the theory of quadratic variation, we develop formal
links between realized volatility and the conditional covariance matrix. Next, using continuously
recorded observations for the Deutschemark / Dollar and Yen / Dollar spot exchange rates covering more
than a decade, we find that forecasts from a simple long-memory Gaussian vector autoregression for the
logarithmic daily realized volatilities perform admirably compared to a variety of popular daily ARCH
and more complicated high-frequency models. Moreover, the vector autoregressive volatility forecast,
coupled with a parametric lognormal-normal mixture distribution implied by the theoretically and
empirically grounded assumption of normally distributed standardized returns, produces well-calibrated
density forecasts of future returns, and correspondingly accurate quantile predictions. Our results hold
promise for practical modeling and forecasting of the large covariance matrices relevant in asset pricing,
asset allocation and financial risk management applications.”

Full article (PDF): Link

 
Comments Off

Posted in Realized volatility

 

Comments are closed.

 
© Copyright 2018 RealVol LLC. All rights reserved