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Long Memory versus Structural Breaks in Modeling and Forecasting Realized Volatility

Kyongwook Choi, Wei-Choun Yu () and Eric Zivot
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Kyongwook Choi: Department of Economics, The University of Seoul,
Eric Zivot: Department of Economics, University of Washington

Working Papers from University of Washington, Department of Economics

Abstract: We explore the possibility of structural breaks in realized volatility with observed long-memory properties for the daily Deutschemark/Dollar, Yen/Dollar and Yen/Deutschemark spot exchange rate realized volatility. We find that structural breaks can partly explain the persistence of realized volatility. We propose a VAR-RV-Break model that provides superior predictive ability compared to most of the forecasting models when the future break is known. With unknown break dates and sizes, we find that the VAR-RV-I(d) long memory model, however, is a very robust forecasting method even when the true financial volatility series are generated by structural breaks.

Date: 2008-09
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Citations: View citations in EconPapers (3)

Forthcoming in Journal of International Money and Finance

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http://faculty.washington.edu/ezivot/research/longMemoryStructuralBreaksRV.pdf (application/pdf)

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Journal Article: Long memory versus structural breaks in modeling and forecasting realized volatility (2010) Downloads
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