Time-Varying Parameter Realized Volatility Models

Time-Varying Parameter Realized Volatility Models

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Article ID: iaor20172445
Volume: 36
Issue: 5
Start Page Number: 566
End Page Number: 580
Publication Date: Aug 2017
Journal: Journal of Forecasting
Authors: , ,
Keywords: simulation, statistics: regression
Abstract:

In this paper, we introduce the functional coefficient to heterogeneous autoregressive realized volatility (HAR‐RV) models to make the parameters change over time. A nonparametric statistic is developed to perform a specification test. The simulation results show that our test displays reliable size and good power. Using the proposed test, we find a significant time variation property of coefficients to the HAR‐RV models. Time‐varying parameter (TVP) models can significantly outperform their constant‐coefficient counterparts for longer forecasting horizons. The predictive ability of TVP models can be improved by accounting for VIX information.

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