The paper proposes an additive cascade model of volatility components defined over different time periods. This volatility cascade leads to a simple AR-type model in the realized volatility with the feature of considering different volatility components realized over different time horizons and thus termed Heterogeneous Autoregressive model of Realized Volatility (HAR-RV). In spite of the simplicity of its structure and the absence of true long-memory properties, simulation results show that the HAR-RV model successfully achieves the purpose of reproducing the main empirical features of financial returns (long memory, fat tails, and self-similarity) in a very tractable and parsimonious way. Moreover, empirical results show remarkably good forecasting performance. Copyright The Author 2009. Published by Oxford University Press. All rights reserved. For Permissions, please e-mail: journals.permissions@oupjournals.org, Oxford University Press.
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Volume (Year): 7 (2009) Issue (Month): 2 (Spring) Pages: 174-196 Download reference. The following formats are available: HTML
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Handle: RePEc:oup:jfinec:v:7:y:2009:i:2:p:174-196
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