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Modeling and forecasting return jumps using realized variation measures

Yi Liu, Huifang Liu and Lei Zhang

Economic Modelling, 2019, vol. 76, issue C, 63-80

Abstract: This paper proposes a simple HAR-RV-based model to predict return jumps through a conditional density of jump size with time-varying moments. We model jump occurrences based on a version of the autoregressive conditional hazard model that relies on past continuous realized volatilities. Applying our methodology to seven equity indices on the U.S. and Chinese stock markets, we reach the following key findings: (i) jump occurrence and size are dependent on past realized volatility, (ii) the proposed model yields superior in- and out-of-sample jump size density forecasts compared to an ARMA(1,1)-GARCH(1,1) model, (iii) and the occurrence and sign of return jumps are predictable to some extent.

Keywords: Realized variation; Jumps; Hazard rates; Probability forecast; Density forecast (search for similar items in EconPapers)
JEL-codes: C1 G1 C2 (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:eee:ecmode:v:76:y:2019:i:c:p:63-80