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A No Arbitrage Fractional Cointegration Analysis Of The Range Based Volatility

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Author Info

  • 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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Bibliographic Info

Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2009-31.

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Length: 34
Date of creation: 15 Jul 2009
Date of revision:
Handle: RePEc:aah:create:2009-31

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Web page: http://www.econ.au.dk/afn/

Related research

Keywords: Range-based volatility estimator; Long memory; Fractional cointegration; Fractional VECM; Stock Index Futures;

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Cited by:
  1. Caporin, Massimiliano & Ranaldo, Angelo & Santucci de Magistris, Paolo, 2012. "On the Predictability of Stock Prices: a Case for High and Low Prices," Working Papers on Finance 1213, University of St. Gallen, School of Finance.

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