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Semi-Parametric Forecasting of Realized Volatility

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Author Info

  • Becker Ralf

    ()
    (University of Manchester)

  • Clements Adam E

    ()
    (Queensland University of Technology)

  • Hurn Stan

    ()
    (Queensland University of Technology)

Abstract

Forecasts generated by time series models traditionally place greater weight on more recent observations. This paper develops an alternative semi-parametric method for forecasting that does not rely on this convention and applies it to the problem of forecasting asset return volatility. In this approach, a forecast is a weighted average of historical volatility, with the greatest weight given to periods that exhibit similar market conditions to the time at which the forecast is being formed. Weighting is determined by comparing short-term trends in volatility across time (as a measure of market conditions) by means of a multivariate kernel scheme. It is found that the semi-parametric method produces forecasts that are significantly more accurate than a number of competing approaches at both short and long forecast horizons.

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Bibliographic Info

Article provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.

Volume (Year): 15 (2011)
Issue (Month): 3 (May)
Pages: 1-23

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Handle: RePEc:bpj:sndecm:v:15:y:2011:i:3:n:1

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Cited by:
  1. Adam Clements & Joanne Fuller, 2012. "Forecasting increases in the VIX: A time-varying long volatility hedge for equities," NCER Working Paper Series 88, National Centre for Econometric Research.
  2. Benoît Sévi, 2014. "Forecasting the volatility of crude oil futures using intraday data," Working Papers 2014-053, Department of Research, Ipag Business School.

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