Heterogeneous Market Hypothesis Evaluations using Various Jump-Robust Realized Volatility

Cheong Chin, Lee Min Cherng and Grace Lee Ching Yap
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Lee Min Cherng: Department of Mathematical and Actuarial Science, University Tunku Abdul Rahman, 43300 Kajang, Selangor, Malaysia.
Grace Lee Ching Yap: Faculty of Engineering, University of Nottingham (Malaysia Campus), 43500 Semenyih, Selangor, Malaysia.

Journal for Economic Forecasting, 2016, issue 4, 50-64

Abstract: The availability of high frequency data has promoted the usage of realized volatility as the unobservable latent volatility in financial markets. However, the traditional realized volatility (RV) representation is not robust to abrupt jumps in nowadays volatile globalized financial markets. This study includes other alternatives of jump-robust realized volatilities namely the bipower, minimum and median nearest neighbor truncation (NNT) volatility proxies in the examination of the heterogeneous market hypothesis (HMH) through the extension of heterogeneous autoregressive (HAR) model specifications. The empirical results show that the aforementioned alternative realized volatilities provide better forecast evaluations as compared to the standard realized volatility. Thus, the alternative realized volatility proxies are better explained the heterogeneous market hypothesis. In addition, the combination forecast models using three weighting schemes indicated better forecast performance as compared to the individual forecast. To complete this study, we illustrate a value-at-risk determination for the emerging Brazilian stock exchange.

Keywords: nearest neighbor truncation estimation; heterogeneous market hypothesis; realized volatility; heterogeneous autoregressive models; value-at-risk (search for similar items in EconPapers)
JEL-codes: C22 C52 C58 G14 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (2)

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