Intraday forecasts of a volatility index: functional time series methods with dynamic updating

Han Lin Shang, Yang Yang () and Fearghal Kearney
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Yang Yang: Australian National University

Annals of Operations Research, 2019, vol. 282, issue 1, No 15, 354 pages

Abstract: Abstract As a forward-looking measure of future equity market volatility, the VIX index has gained immense popularity in recent years to become a key measure of risk for market analysts and academics. We consider discrete reported intraday VIX tick values as realisations of a collection of curves observed sequentially on equally spaced and dense grids over time and utilise functional data analysis techniques to produce 1-day-ahead forecasts of these curves. The proposed method facilitates the investigation of dynamic changes in the index over very short time intervals as showcased using the 15-s high-frequency VIX index values. With the help of dynamic updating techniques, our point and interval forecasts are shown to enjoy improved accuracy over conventional time series models.

Keywords: Functional principal component regression; Functional linear regression; Ordinary least squares; Penalised least squares; High-frequency financial data (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1007/s10479-018-3108-4

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