The Exponential HEAVY Model: An Improved Approach to Volatility Modeling and Forecasting

Yongdeng Xu

No E2022/5, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

Abstract: This paper proposes an Exponential HEAVY (EHEAVY) model, which specifies the dynamics of returns and realized measures of volatility in an exponential form. The model ensures positivity of volatility and allows for asymmetric effects without restrictions on parameters, hence is more flexible. A joint quasi-maximum likelihood estimation and closed-form multi-step ahead forecasting is derived. The EHEAVY model is applied to 31 assets from the Oxford-Man Institute's realized library, and the empirical results demonstrate that return volatility dynamics are driven by the realized measure, while the asymmetric effect is captured by the return shock. The out-of-sample forecast results show that the EHEAVY model has superior forecasting performance compared the HEAVY, AHEAVY, and realized EGARCH models. The portfolio exercise further confirms the superior economic value of the EHEAVY model, as measured by the certain equivalent return and expected utility.

Keywords: HEAVY model; High-frequency data; Asymmetric effects; Realized variance; Portfolio (search for similar items in EconPapers)
JEL-codes: C32 C53 G11 G17 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2022-03
New Economics Papers: this item is included in nep-cwa, nep-ecm, nep-ets and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:cdf:wpaper:2022/5

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