A new combination approach to reducing forecast errors with an application to volatility forecasting

Till Weigt and Bernd Wilfling

No 4616, CQE Working Papers from Center for Quantitative Economics (CQE), University of Muenster

Abstract: This paper formally establishes a new forecast combination approach, which is based on VAR modeling of the forecast errors resulting from alternative forecast models. We apply our approach to volatility forecasting by combining several structural time series models with implied volatility. Using a multi-currency data set, we conduct in-sample and out-of-sample forecasting analyses in order (a) to demonstrate the statistical significance of our approach, and (b) to assess its forecasting superiority over alternative forecasting models and combinations.

Keywords: Forecast combination; volatility forecasting; realized volatility; implied volatility; exchange rates (search for similar items in EconPapers)
JEL-codes: C53 G17 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2016-04
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-for
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Persistent link: https://EconPapers.repec.org/RePEc:cqe:wpaper:4616

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