Long memory versus structural breaks in modeling and forecasting realized volatility

Kyongwook Choi, Wei-Choun Yu () and Eric Zivot

Journal of International Money and Finance, 2010, vol. 29, issue 5, 857-875

Abstract: We explore the possibility of structural breaks in the daily realized volatility of the Deutschemark/Dollar, Yen/Dollar and Yen/Deutschemark spot exchange rates with observed long memory behavior. We find that structural breaks in the mean can partly explain the persistence of realized volatility. We propose a VAR-RV-Break model that provides superior predictive ability when the timing of future breaks is known. With unknown break dates and sizes, we find that a VAR-RV-I(d) long memory model provides a robust forecasting method even when the true financial volatility series are generated by structural breaks.

Keywords: Realized; volatility; Exchange; rate; Long; memory; Structural; break; Fractional; integration; Volatility; forecasting (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (65)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:29:y:2010:i:5:p:857-875

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