Volatility forecasting: the jumps do matter

Fulvio Corsi (), Davide Pirino () and Roberto Renò

Department of Economics University of Siena from Department of Economics, University of Siena

Abstract: This study reconsiders the role of jumps for volatility forecasting by showing that jumps have positive and mostly significant impact on future volatility. This result becomes apparent once volatility is correctly separated into its continuous and discontinuous component. To this purpose, we introduce the concept of threshold multipower variation (TMPV), which is based on the joint use of bipower variation and threshold estimation. With respect to alternative methods, our TMPV estimator provides less biased and robust estimates of the continuous quadratic variation and jumps. This technique also provides a new test for jump detection which has substantially more power than traditional tests. We use this separation to forecast volatility by employing an heterogeneous autoregressive (HAR) model which is suitable to parsimoniously model long memory in realized volatility time series. Empirical analysis shows that the proposed techniques improve significantly the accuracy of volatility forecasts for the S&P500 index, single stocks and US bond yields, especially in periods following the occurrence of a jump

Keywords: volatility forecasting; jumps; bipower variation; threshold estimation; stock; bond (search for similar items in EconPapers)
JEL-codes: C1 C22 C53 G1 (search for similar items in EconPapers)
Date: 2008-06
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-for, nep-mst and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Related works:
Working Paper: Volatility Forecasting: The Jumps Do Matter (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:usi:wpaper:534

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