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Analytic Evaluation of Volatility Forecasts

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  • Torben G. Andersen
  • Tim Bollerslev
  • Nour Meddahi

Abstract

Estimation and forecasting for realistic continuous-time stochastic volatility models is hampered by the lack of closed-form expressions for the likelihood. In response, Andersen, Bollerslev, Diebold, and Labys ("Econometrica", 71 (2003), 579-625) advocate forecasting integrated volatility via reduced-form models for the realized volatility, constructed by summing high-frequency squared returns. Building on the eigenfunction stochastic volatility models, we present analytical expressions for the forecast efficiency associated with this reduced-form approach as a function of sampling frequency. For popular models like GARCH, multifactor affine, and lognormal diffusions, the reduced form procedures perform remarkably well relative to the optimal (infeasible) forecasts. Copyright 2004 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Torben G. Andersen & Tim Bollerslev & Nour Meddahi, 2002. "Analytic Evaluation of Volatility Forecasts," CIRANO Working Papers 2002s-90, CIRANO.
    • Handle: RePEc:cir:cirwor:2002s-90
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    More about this item

    Keywords

    Continuous-time models; eigenfunction stochastic volatility models; integrated volatility; realized volatility; high-frequency data; time series forecasting; Mincer-Zarnowitz regressions; modèles à temps continu; modèles à volatilité stochastique basée sur des fonctions propres; volatilité intégrée; volatilité réalisée; données à haute fréquence; prévision de séries chronologiques; régressions de Mincer-Zarnowitz;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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