Forecasting variance using stochastic volatility and GARCH

Björn Hansson () and Peter Hördahl

The European Journal of Finance, 2005, vol. 11, issue 1, 33-57

Abstract: This paper estimates the conditional variance of daily Swedish OMX-index returns with stochastic volatility (SV) models and GARCH models and evaluates the in-sample performance as well as the out-of-sample forecasting ability of the models. Asymmetric as well as weekend/holiday effects are allowed for in the variance, and the assumption that errors are Gaussian is released. Evidence is found of a leverage effect and of higher variance during weekends. In both in-sample and out-of-sample comparisons SV models outperform GARCH models. However, while asymmetry, weekend/holiday effects and non-Gaussian errors are important for the in-sample fit, it is found that these factors do not contribute to enhancing the forecasting ability of the SV models.

Keywords: Variance; stochastic volatility; GARCH models; forecasting ability; weekend/holiday effects (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (4)

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DOI: 10.1080/1351847021000025803

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