Forecasting volatility using realized stochastic volatility model with time-varying leverage effect

Xinyu Wu and Xiaona Wang

Finance Research Letters, 2020, vol. 34, issue C

Abstract: This paper proposes a realized stochastic volatility model with time-varying leverage effect (hereafter the RSV-TVL model), in which the time-varying leverage effect is modelled based on a linear spline. The model parameters are estimated by using the maximum likelihood method based on a continuous particle filter. Simulation results show that the proposed estimation method works well. An empirical application to S&P 500 index highlights the value of incorporating the realized volatility measure and the time-varying leverage effect into volatility forecasting, and shows that the RSV-TVL model produces more accurate out-of-sample forecasts of volatility than the alternatives.

Keywords: Realized volatility measure; Stochastic volatility; Time-varying leverage effect; Linear spline; Continuous particle filter (search for similar items in EconPapers)
JEL-codes: C32 C5 G17 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:34:y:2020:i:c:s1544612319305021

DOI: 10.1016/j.frl.2019.08.019

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