Forecasting Exchange Rate Volatility: The Superior Performance of Conditional Combinations of Time Series and Option Implied Forecasts
AbstractThis paper provides empirical evidence that combinations of option implied and time series volatility forecasts that are conditional on current information are statistically superior to individual models, unconditional combinations, and hybrid forecasts. Superior forecasting performance is achieved by both, taking into account the conditional expected performance of each model given current information, and combining individual forecasts. The method used in this paper to produce conditional combinations extends the application of conditional predictive ability tests to select forecast combinations. The application is for volatility forecasts of the Mexican Peso-US Dollar exchange rate, where realized volatility calculated using intra-day data is used as a proxy for the (latent) daily volatility.
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Bibliographic InfoPaper provided by Banco de México in its series Working Papers with number 2009-01.
Date of creation: Jan 2009
Date of revision:
Composite Forecasts; Forecast Evaluation; GARCH; Implied volatility; Mexican Peso-U.S. Dollar Exchange Rate; Regime-Switching;
Other versions of this item:
- Benavides, Guillermo & Capistrán, Carlos, 2012. "Forecasting exchange rate volatility: The superior performance of conditional combinations of time series and option implied forecasts," Journal of Empirical Finance, Elsevier, vol. 19(5), pages 627-639.
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-03-14 (All new papers)
- NEP-ECM-2009-03-14 (Econometrics)
- NEP-ETS-2009-03-14 (Econometric Time Series)
- NEP-FOR-2009-03-14 (Forecasting)
- NEP-IFN-2009-03-14 (International Finance)
- NEP-ORE-2009-03-14 (Operations Research)
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