Forecasting Trading-Session Return Volatility in Taiwan Futures Market: A Periodic Regime Switching with Jump Approach

Yi-Hao Lai (), Yi-Chiuan Wang () and Yu-Ching Chang ()
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Yi-Hao Lai: Dayeh University
Yi-Chiuan Wang: Tunghai University
Yu-Ching Chang: Providence University

Asia-Pacific Financial Markets, 2024, vol. 31, issue 2, No 4, 285-305

Abstract: Abstract This study develops a novel periodic regime-switching model (the PRS model) to improve the forecasting of stock market volatility by accounting for the information from non-trading and trading periods, including regular trading and after-hour trading. Empirical analysis of the Taiwan Futures Exchange (TAIFEX) demonstrates the significant improvements of the PRS model in both in-sample and out-of-sample periods. Our results also show that the introduction of after-hour trading sessions has provided valuable information for volatility forecasting in subsequent regular trading sessions, emphasizing the importance of considering diverse information flows across different trading and non-trading times. The PRS model effectively captures the dynamics of non-trading and trading sessions and the influence of unusual news arrivals and jumps on market volatility, contributing to investment and risk management strategies.

Keywords: Volatility forecasting; Periodic regime switching model; Out-of-sample; Jump process (search for similar items in EconPapers)
JEL-codes: C01 C24 G13 G17 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10690-023-09415-w

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