TY - JOUR
T1 - An integrated heteroscedastic autoregressive model for forecasting realized volatilities
AU - Cho, Soojin
AU - Shin, Dong Wan
N1 - Funding Information:
The authors are very grateful for two anonymous referees whose constructive comments improve the paper significantly. This research was supported by the National Research Foundation of Korea (NRF) ( 2015-1006133 ).
Publisher Copyright:
© 2016 The Korean Statistical Society
PY - 2016/9/1
Y1 - 2016/9/1
N2 - A new strategy for forecasting realized volatility (RV) is proposed for the heteroscedastic autoregressive (HAR) model of Corsi (2009). The strategy is constraining the sum of the HAR coefficients to one, resulting in an integrated model, called IHAR model. The IHAR model is motivated by stationarity of estimated HAR model, downward biases of estimated HAR coefficients, and over-rejection of ADF test for long-memory processes. Considerable out-of-sample forecast improvements of the IHAR model over the HAR model are demonstrated for RVs of 4 financial assets: the US S&P 500 index, the US NASDAQ index, the Japan yen/US dollar exchange rate, and the EU euro/US dollar exchange rate. Forecast improvement is also verified in a Monte Carlo experiment and in an empirical comparison for an extended data set. The forecast improvement is shown to be a consequence of the fact that the IHAR model takes better advantage of the long memory of RV and the conditional heteroscedasticity of RV than the HAR model.
AB - A new strategy for forecasting realized volatility (RV) is proposed for the heteroscedastic autoregressive (HAR) model of Corsi (2009). The strategy is constraining the sum of the HAR coefficients to one, resulting in an integrated model, called IHAR model. The IHAR model is motivated by stationarity of estimated HAR model, downward biases of estimated HAR coefficients, and over-rejection of ADF test for long-memory processes. Considerable out-of-sample forecast improvements of the IHAR model over the HAR model are demonstrated for RVs of 4 financial assets: the US S&P 500 index, the US NASDAQ index, the Japan yen/US dollar exchange rate, and the EU euro/US dollar exchange rate. Forecast improvement is also verified in a Monte Carlo experiment and in an empirical comparison for an extended data set. The forecast improvement is shown to be a consequence of the fact that the IHAR model takes better advantage of the long memory of RV and the conditional heteroscedasticity of RV than the HAR model.
KW - Conditional heteroscedasticity
KW - Fractional integration
KW - HAR model
KW - High frequency data
KW - Long-memory
KW - Volatility forecasting
UR - http://www.scopus.com/inward/record.url?scp=84960171683&partnerID=8YFLogxK
U2 - 10.1016/j.jkss.2015.12.004
DO - 10.1016/j.jkss.2015.12.004
M3 - Article
AN - SCOPUS:84960171683
SN - 1226-3192
VL - 45
SP - 371
EP - 380
JO - Journal of the Korean Statistical Society
JF - Journal of the Korean Statistical Society
IS - 3
ER -