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Analysis on the Forecasting Performance of KOSPI200 Volatility between Long Memory Model and Regime-Switching Model (in Korean)

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  • Joonhyuk Song

    (Division of Economics, Hankuk University of Foreign Studies)

Abstract

This paper investigates the long memory property of KOSPI200 volatility and compare the forecasting power between the long memory and regime switching models. When no regime-switching is assumed, the realized volatility and VKOSPI show no signs of permanent memory, but suggest that both of them have stationary long memory properties. Long memory can be spurious in the presence of structural or regime changes. In order to see this, 1-day and 5-day ahead volatility forecasting test, based on Diebold-Mariano(1995), are conducted to compare model prediction power between long memory and regime-switching models. The test shows that regime-switching model is more accurate in 1-day ahead realized volatility forecasting, while 1-day ahead forecasting shows no difference between the models. It suggests that long memory process of stock volatility can be better understood when structural-changing features of the volatility are given more attention.

Suggested Citation

  • Joonhyuk Song, 2011. "Analysis on the Forecasting Performance of KOSPI200 Volatility between Long Memory Model and Regime-Switching Model (in Korean)," Economic Analysis (Quarterly), Economic Research Institute, Bank of Korea, vol. 17(4), pages 99-127, December.
    • Handle: RePEc:bok:journl:v:17:y:2011:i:4:p:99-127
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    Keywords

    Realized volatility; VKOSPI; Long memory; DM test;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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