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Forecasting Realized Volatility by Decomposition

Markku Lanne

No ECO2006/20, Economics Working Papers from European University Institute

Abstract: Forecasts of the realized volatility of the exchange rate returns of the Euro against the U.S. Dollar obtained directly and through decomposition are compared. Decomposing the realized volatility into its continuous sample path and jump components and modeling and forecasting them separately instead of directly forecasting the realized volatility is shown to lead to improved out-of-sample forecasts. Moreover, gains in forecast accuracy are robust with respect to the details of the decomposition.

Keywords: Mixture model; Jump; Realized volatility; Gamma distribution (search for similar items in EconPapers)
JEL-codes: C22 C52 C53 G15 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-fin, nep-fmk, nep-for, nep-ifn and nep-mst
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