Predicting volatility is of primary importance for business applications in risk management, asset allocation, and the pricing of derivative instruments. This paper proposes a measurement model that considers the possibly time-varying interaction of realized volatility and asset returns according to a bivariate model to capture its major characteristics: (i) the long-term memory of the volatility process, (ii) the heavy-tailedness of the distribution of returns, and (iii) the negative dependence of volatility and daily market returns. We assess the relevance of the effects of “the volatility of volatility” and time-varying “leverage” to the out-of-sample forecasting performance of the model, and evaluate the density of forecasts of market volatility. Empirical results show that our specification can outperform the benchmark HAR–GARCH model in terms of both point and density forecasts.

Catania, L., Proietti, T. (2020). Forecasting volatility with time-varying leverage and volatility of volatility effects. INTERNATIONAL JOURNAL OF FORECASTING, 36(4), 1301-1317 [10.1016/j.ijforecast.2020.01.003].

Forecasting volatility with time-varying leverage and volatility of volatility effects

Proietti, T
2020-01-01

Abstract

Predicting volatility is of primary importance for business applications in risk management, asset allocation, and the pricing of derivative instruments. This paper proposes a measurement model that considers the possibly time-varying interaction of realized volatility and asset returns according to a bivariate model to capture its major characteristics: (i) the long-term memory of the volatility process, (ii) the heavy-tailedness of the distribution of returns, and (iii) the negative dependence of volatility and daily market returns. We assess the relevance of the effects of “the volatility of volatility” and time-varying “leverage” to the out-of-sample forecasting performance of the model, and evaluate the density of forecasts of market volatility. Empirical results show that our specification can outperform the benchmark HAR–GARCH model in terms of both point and density forecasts.
2020
Pubblicato
Rilevanza internazionale
Articolo
Esperti anonimi
Settore SECS-S/03 - STATISTICA ECONOMICA
Settore STAT-02/A - Statistica economica
English
Con Impact Factor ISI
Catania, L., Proietti, T. (2020). Forecasting volatility with time-varying leverage and volatility of volatility effects. INTERNATIONAL JOURNAL OF FORECASTING, 36(4), 1301-1317 [10.1016/j.ijforecast.2020.01.003].
Catania, L; Proietti, T
Articolo su rivista
File in questo prodotto:
File Dimensione Formato  
1-s2.0-S0169207020300121-main.pdf

solo utenti autorizzati

Tipologia: Versione Editoriale (PDF)
Licenza: Copyright dell'editore
Dimensione 3.3 MB
Formato Adobe PDF
3.3 MB Adobe PDF   Visualizza/Apri   Richiedi una copia

I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/2108/236639
Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus 16
  • ???jsp.display-item.citation.isi??? 15
social impact