Prediction of linear fractional stable motions using codifference, with application to non-Gaussian rough volatility

Matthieu Garcin (), Karl Sawaya and Thomas Valade
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Matthieu Garcin: DVRC - De Vinci Research Center - DVHE - De Vinci Higher Education
Karl Sawaya: Institute of Mathematics, École Polytechnique Fédérale de Lausanne, Switzerland
Thomas Valade: LadHyX - Laboratoire d'hydrodynamique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique

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Abstract: The linear fractional stable motion (LFSM) extends the fractional Brownian motion (fBm) by considering alpha-stable increments. We propose a method to forecast future increments of the LFSM from past discrete-time observations, using the conditional expectation when alpha>1 or a semimetric projection otherwise. It relies on the codifference, which describes the serial dependence of the process, instead of the covariance. Indeed, covariance is commonly used for predicting an fBm but it is infinite when alpha<2. Some theoretical properties of the method and of its accuracy are studied and both a simulation study and an application to real data confirm the relevance of the approach. The LFSM-based method outperforms the fBm, when forecasting high-frequency FX rates. It also shows a promising performance in the forecast of time series of volatilities, decomposing properly, in the fractal dynamic of rough volatilities, the contribution of the kurtosis of the increments and the contribution of their serial dependence. Moreover, the analysis of hit ratios suggests that, beside independence, persistence, and antipersistence, a fourth regime of serial dependence exists for fractional processes, characterized by a selective memory controlled by a few large increments.

Keywords: codifference; fractional process; Hurst exponent; spectral measure; stable distribution (search for similar items in EconPapers)
Date: 2025-11-13
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