Forecasting stock market volatility: The sum of the parts is more than the whole

Shang Gao, Zhikai Zhang, Yudong Wang and Yaojie Zhang

Finance Research Letters, 2023, vol. 55, issue PA

Abstract: The volatility of financial assets can be decomposed into upside volatility and downside volatility. However, these two components have unique properties, so their predictability is completely different. In this paper, we explore a new forecasting method to predict the S&P 500 volatility by separately modeling upside volatility and downside volatility and summing the forecasts up. Our new method is proved to have better performance compared with directly modeling aggregate volatility. Moreover, the gains in forecast accuracy are robust concerning the individual and combined models.

Keywords: Realized semi-variance; Variance decomposition; HAR model; Volatility forecasting (search for similar items in EconPapers)
JEL-codes: C22 C53 C58 G12 G17 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:55:y:2023:i:pa:s1544612323002210

DOI: 10.1016/j.frl.2023.103849

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