Forecasting Volatility with Copula-Based Time Series Models

Oleg Sokolinskiy () and Dick van Dijk
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Oleg Sokolinskiy: Erasmus University Rotterdam

No 11-125/4, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: This paper develops a novel approach to modeling and forecasting realized volatility (RV) measures based on copula functions. Copula-based time series models can capture relevant characteristics of volatility such as nonlinear dynamics and long-memory type behavior in a flexible yet parsimonious way. In an empirical application to daily volatility for S&P500 index futures, we find that the copula-based RV (C-RV) model outperforms conventional forecasting approaches for one-day ahead volatility forecasts in terms of accuracy and efficiency. Among the copula specifications considered, the Gumbel C-RV model achieves the best forecast performance, which highlights the importance of asymmetry and upper tail dependence for modeling volatility dynamics. Although we find substantial variation in the copula parameter estimates over time, conditional copulas do not improve the accuracy of volatility forecasts.

Keywords: Nonlinear dependence; long memory; copulas; volatility forecasting (search for similar items in EconPapers)
JEL-codes: C22 C53 C58 G17 (search for similar items in EconPapers)
Date: 2011-09-05
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Citations: View citations in EconPapers (8)

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