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A No Arbitrage Fractional Cointegration Analysis Of The Range Based Volatility

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  • Eduardo Rossi

    (Dipartimento di economia politica e metodi quantitativi, University of Pavia, Italy.)

  • Paolo Santucci de Magistris

    (Dipartimento di economia politica e metodi quantitativi, University of Pavia, Italy)

Abstract

The no arbitrage relation between futures and spot prices implies an analogous relation between futures and spot volatilities as measured by daily range. Long memory features of the range-based volatility estimators of the two series are analyzed, and their joint dynamics are modeled via a fractional vector error correction model (FVECM), in order to explicitly consider the no arbitrage constraints. We introduce a two-step estimation procedure for the FVECM parameters and we show the properties by a Monte Carlo simulation. The out-of-sample forecasting superiority of FVECM, with respect to competing models, is documented. The results highlight the importance of giving fully account of long-run equilibria in volatilities in order to obtain better forecasts.

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  • Eduardo Rossi & Paolo Santucci de Magistris, 2009. "A No Arbitrage Fractional Cointegration Analysis Of The Range Based Volatility," CREATES Research Papers 2009-31, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:create:2009-31
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    Cited by:

    1. Caporin, Massimiliano & Ranaldo, Angelo & Santucci de Magistris, Paolo, 2013. "On the predictability of stock prices: A case for high and low prices," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5132-5146.

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    More about this item

    Keywords

    Range-based volatility estimator; Long memory; Fractional cointegration; Fractional VECM; Stock Index Futures;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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