Modeling realized volatility with implied volatility for the EUR/GBP exchange rate

Anna Rokicka and Janusz Kudła

Journal of Risk

Abstract: This paper concerns the application of implied volatility in modeling realized volatility in the daily, weekly and monthly horizon using high-frequency data for the EUR/GBP exchange rate. The EUR/GBP rate was chosen because it is under stress triggered by the uncertainty related to Brexit. The heterogeneous autoregression (HAR) model of realized volatility and its extensions were used for the study: the HAR model extended by the measurement error component and by the components of the asymmetry of returns. The introduction of implied volatility into the HAR forecast model improves the predictions in the periods considered irrespective of the period chosen. In particular, we find new evidence that implied volatility obtained from options with a weekly expiration date improves the quality of volatility forecasts. The best prediction for daily and weekly volatility provides the model with asymmetry of returns. For monthly volatility, the model corrected for measurement errors has the best fit.

References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.risk.net/journal-of-risk/7820086/model ... eurgbp-exchange-rate (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rsk:journ4:7820086

Access Statistics for this article

More articles in Journal of Risk from Journal of Risk
Bibliographic data for series maintained by Thomas Paine ().