Volatility or higher moments: Which is more important in return density forecasts of stochastic volatility model?

Chenxing Li, Zehua Zhang and Ran Zhao

Finance Research Letters, 2024, vol. 67, issue PB

Abstract: Extensions of the stochastic volatility (SV) model focus on improving volatility inference or modeling higher moments of the return distribution. This study investigates which extension can better improve return density forecasts. By examining various specifications with S&P 500 daily returns for nearly 20 years, we find that a more accurate capture of volatility dynamics with realized volatility and implied volatility is more important than modeling higher moments for a conventional SV model in terms of both density and tail forecasts. The accuracy of volatility estimation and forecasts should be the precondition for higher moment extensions.

Keywords: Stochastic volatility; Realized volatility; Implied volatility; MCMC; Density forecast (search for similar items in EconPapers)
JEL-codes: C11 C15 C22 C52 (search for similar items in EconPapers)
Date: 2024
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Working Paper: Volatility or higher moments: Which is more important in return density forecasts of stochastic volatility model? (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:67:y:2024:i:pb:s1544612324008547

DOI: 10.1016/j.frl.2024.105824

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