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Correcting the Errors: Volatility Forecast Evaluation Using High-Frequency Data and Realized Volatilities

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Author Info
Torben G. Andersen
Tim Bollerslev
Nour Meddahi

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Abstract

We develop general model-free adjustment procedures for the calculation of unbiased volatility loss functions based on practically feasible realized volatility benchmarks. The procedures, which exploit recent nonparametric asymptotic distributional results, are both easy-to-implement and highly accurate in empirically realistic situations. We also illustrate that properly accounting for the measurement errors in the volatility forecast evaluations reported in the existing literature can result in markedly higher estimates for the true degree of return volatility predictability. Copyright The Econometric Society 2005.

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File URL: http://hdl.handle.net/10.1111/j.1468-0262.2005.00572.x
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Publisher Info
Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 73 (2005)
Issue (Month): 1 (01)
Pages: 279-296
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Handle: RePEc:ecm:emetrp:v:73:y:2005:i:1:p:279-296

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  1. Helena Veiga, 2006. "Volatility Forecasts: A Continuous Time Model Versus Discrete Time Models1," Statistics and Econometrics Working Papers ws062509, Universidad Carlos III, Departamento de Estadística y Econometría. [Downloadable!]
  2. Peter C.B. Phillips & Jun Yu, 2007. "Information Loss in Volatility Measurement with Flat Price Trading," Cowles Foundation Discussion Papers 1598, Cowles Foundation, Yale University. [Downloadable!]
    Other versions:
  3. Torben G. Andersen & Dobrislav Dobrev & Ernst Schaumburg, 2009. "Jump-Robust Volatility Estimation using Nearest Neighbor Truncation," CREATES Research Papers 2009-52, School of Economics and Management, University of Aarhus. [Downloadable!]
  4. Torben G. Andersen & Dobrislav Dobrev & Ernst Schaumburg, 2009. "Duration-Based Volatility Estimation," Global COE Hi-Stat Discussion Paper Series gd08-034, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
  5. Mende, Alexander, 2005. "09/11 on the USD/EUR Foreign Exchange Market," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-312, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
    Other versions:
  6. Andrew Patton, 2006. "Volatility Forecast Comparison using Imperfect Volatility Proxies," Research Paper Series 175, Quantitative Finance Research Centre, University of Technology, Sydney. [Downloadable!]
  7. Tsiaras, Leonidas, 2009. "The Forecast Performance of Competing Implied Volatility Measures: The Case of Individual Stocks," Finance Research Group Working Papers F-2009-02, University of Aarhus, Aarhus School of Business, Department of Business Studies. [Downloadable!]
  8. Chun Liu & John M. Maheu, 2009. "Forecasting realized volatility: a Bayesian model-averaging approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 24(5), pages 709-733. [Downloadable!]
    Other versions:
  9. Mende, Alexander & Menkhoff, Lukas, 2006. "Profits and Speculation in Intra-Day Foreign Exchange Trading," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-339, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
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  10. Lin Peng & Turan G. Bali, 2006. "Is there a risk-return trade-off? Evidence from high-frequency data," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(8), pages 1169-1198. [Downloadable!]
  11. Michel Beine & Charles S. Bos & Sebastian Laurent, 2005. "The Impact of Central Bank FX Interventions on Currency Components," Tinbergen Institute Discussion Papers 05-103/4, Tinbergen Institute. [Downloadable!]
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  12. Gael M. Martin & Andrew Reidy & Jill Wright, 2006. "Assessing the Impact of Market Microstructure Noise and Random Jumps on the Relative Forecasting Performance of Option-Implied and Returns-Based Volatility," Monash Econometrics and Business Statistics Working Papers 10/06, Monash University, Department of Econometrics and Business Statistics. [Downloadable!]
  13. Sucarrat, Genaro, 2009. "Forecast Evaluation of Explanatory Models of Financial Variability," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 3(8), pages 1-33. [Downloadable!]
  14. Valentina Corradi & Norman Swanson & Walter Distaso, 2006. "Predictive Density Estimators for Daily Volatility Based on the Use of Realized Measures," Departmental Working Papers 200620, Rutgers University, Department of Economics. [Downloadable!]
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