 Volatility conditional on price trendsGilles Zumbach Quantitative Finance, 2010, vol. 10, issue 4, 431-442 Abstract: The influence of the past price behaviour on the realized volatility is investigated, showing that trending (driftless) prices lead to increased (decreased) realized volatility. This 'volatility induced by trend' constitutes a new stylized fact. The past price behaviour is measured by the product of two non-overlapping returns (of the form r × L[r] where L is the lag operator), and is different from the usual heteroskedasticity. The effect is studied empirically using USD/CHF foreign exchange data, in a large range of time horizons. On the modelling side, a set of ARCH based processes are modified in order to include the 'volatility induced by trend' effect, and their forecasting performances are compared. The aim is to understand the role and importance of the various terms that can be included in such a model. For a better forecast, it is shown that the main factor is the shape of the memory kernel (i.e. power law), and the next most important factor is the trend effect. The subtle role of mean reversion is also discussed. Keywords: Trend effect; ARCH process; Volatility forecasting; Long memory (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:10:y:2010:i:4:p:431-442 Ordering information: This journal article can be ordered from DOI: 10.1080/14697680903266730 Access Statistics for this article Quantitative Finance is currently edited by Michael Dempster and Jim Gatheral More articles in Quantitative Finance from Taylor & Francis Journals |
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