The volatility of realized volatility

Using unobservable conditional variance as measure, latent-variable approaches, such as GARCH and stochastic-volatility models, have traditionally been dominating the empirical finance literature. In recent years, with t
Using unobservable conditional variance as measure, latent-variable approaches, such as GARCH and stochastic-volatility models, have traditionally been dominating the empirical finance literature. In recent years, with the availability of high-frequency financial market data modeling realized volatility has become a new and innovative research direction. By constructing "observable" or realized volatility series from intraday transaction data, the use of standard time series models, such as ARFIMA models, have become a promising strategy for modeling and predicting (daily) volatility. In this paper, we show that the residuals of the commonly used time-series models for realized volatility exhibit non-Gaussianity and volatility clustering. We propose extensions to explicitly account for these properties and assess their relevance when modeling and forecasting realized volatility. In an empirical application for S&P500 index futures we show that allowing for time-varying volatility of realized volatility leads to a substantial improvement of the model's fit as well as predictive performance. Furthermore, the distributional assumption for residuals plays a crucial role in density forecasting. Klassifikation: C22, C51, C52, C53
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Metadaten
Author:Fulvio Corsi, Uta Kretschmer, Stefan Mittnik, Christian Pigorsch
URN:urn:nbn:de:hebis:30-25891
Series (Serial Number):CFS working paper series (2005, 33)
Document Type:Working Paper
Language:English
Date of Publication (online):2006/05/02
Year of first Publication:2005
Publishing Institution:Univ.-Bibliothek Frankfurt am Main
Release Date:2006/05/02
Tag:GARCH ; density forecasting; finance ; normal inverse gaussian distribution ; realized quarticity ; realized volatility
Source:CFS working paper ; 2005,33
HeBIS PPN:197420028
Institutes:Center for Financial Studies (CFS)
Dewey Decimal Classification:330 Wirtschaft
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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