Modeling and forecasting exchange rate volatility in time-frequency domain
AbstractThis paper investigates how the forecasts of volatility vary with different high frequency measures. In addition, using a forecasting model based on Realized GARCH combined with time-frequency decomposed volatility, we attempt to study the influence of intra-day investment horizons on daily volatility forecasts. The decomposition of volatility into several investment horizons and jumps is possible due to a recently proposed jump wavelet two scale realized volatility estimator (JWTSRV). On exchange rate futures data covering the recent financial crisis, we moreover compare forecasts using several additional realized volatility measures. Our results show that inclusion of jumps and realized measures robust to noise improves forecasting ability of the model considerably. Thus for a forecaster, it is crucial to use proper high frequency measure. An interesting insight into the volatility process is also provided by its decomposition. We find that most of the information for future volatility comes from high frequency part of the spectra representing very short investment horizons.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1204.1452.
Date of creation: Apr 2012
Date of revision: Aug 2013
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-04-17 (All new papers)
- NEP-ECM-2012-04-17 (Econometrics)
- NEP-ETS-2012-04-17 (Econometric Time Series)
- NEP-FOR-2012-04-17 (Forecasting)
- NEP-MST-2012-04-17 (Market Microstructure)
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