EconPapers    
Economics at your fingertips  
 

Robust pair‐copula based forecasts of realized volatility

Beatriz Vaz de Melo Mendes and Victor Bello Accioly

Applied Stochastic Models in Business and Industry, 2014, vol. 30, issue 2, 183-199

Abstract: A useful application for copula functions is modeling the dynamics in the conditional moments of a time series. Using copulas, one can go beyond the traditional linear ARMA (p,q) modeling, which is solely based on the behavior of the autocorrelation function, and capture the entire dependence structure linking consecutive observations. This type of serial dependence is best represented by a canonical vine decomposition, and we illustrate this idea in the context of emerging stock markets, modeling linear and nonlinear temporal dependences of Brazilian series of realized volatilities. However, the analysis of intraday data collected from e‐markets poses some specific challenges. The large amount of real‐time information calls for heavy data manipulation, which may result in gross errors. Atypical points in high‐frequency intraday transaction prices may contaminate the series of daily realized volatilities, thus affecting classical statistical inference and leading to poor predictions. Therefore, in this paper, we propose to robustly estimate pair‐copula models using the weighted minimum distance and the weighted maximum likelihood estimates (WMLE). The excellent performance of these robust estimates for pair‐copula models are assessed through a comprehensive set of simulations, from which the WMLE emerged as the best option for members of the elliptical copula family. We evaluate and compare alternative volatility forecasts and show that the robustly estimated canonical vine‐based forecasts outperform the competitors. Copyright © 2013 John Wiley & Sons, Ltd.

Date: 2014
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://doi.org/10.1002/asmb.1960

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:wly:apsmbi:v:30:y:2014:i:2:p:183-199

Access Statistics for this article

More articles in Applied Stochastic Models in Business and Industry from John Wiley & Sons
Bibliographic data for series maintained by Wiley Content Delivery ().

 
Page updated 2025-03-20
Handle: RePEc:wly:apsmbi:v:30:y:2014:i:2:p:183-199