Modeling and forecasting realized volatility: getting the most out of the jump component

Adam Clements and Yin Liao ()

No 93, NCER Working Paper Series from National Centre for Econometric Research

Abstract: Modeling and forecasting realized volatility is of paramount importance. Recent econometric developments allow total volatility to be decomposed into its' constituent continuous and jump components. While previous studies have examined the role of both components in forecasting, little analysis has been undertaken into how best to harness the jump component. This paper considers how to get the most out of the jump component for the purposes of forecasting total volatility. In combination with the magnitude of past jumps, the intensity of jump occurrence is examined. Estimated jump intensity from a point process model is used within a forecasting regression framework. Even in the presence of the diffusive part of total volatility, and past jump size, intensity is found to significantly improve forecast accuracy. The improvement is particularly apparent on the days when jumps occur or when markets are turbulent. Overall, the best way to harness the jump component for volatility forecasting is to make use of both the magnitude and probability of jump occurrences.

Keywords: Realized volatility; diffusion; jumps; point process; Hawkes process; forecasting (search for similar items in EconPapers)
JEL-codes: C22 G00 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2013-08-29
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.ncer.edu.au/papers/documents/WP93.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 500 Can't connect to www.ncer.edu.au:443 (hostname verification failed) (http://www.ncer.edu.au/papers/documents/WP93.pdf [302 Moved Temporarily]--> https://www.ncer.edu.au/papers/documents/WP93.pdf)

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:qut:auncer:2013_5

Access Statistics for this paper

More papers in NCER Working Paper Series from National Centre for Econometric Research Contact information at EDIRC.
Bibliographic data for series maintained by School of Economics and Finance ( this e-mail address is bad, please contact ).