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General-to-specific modelling of exchange rate volatility: a forecast evaluation

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  • BAUWENS, Luc
  • SUCARRAT, Genaro

Abstract

The general-to-specific (GETS) methodology is widely employed in the modelling of economic series, but less so in financial volatility modelling due to computational complexity when many explanatory variables are involved. This study proposes a simple way of avoiding this problem when the conditional mean can appropriately be restricted to zero, and undertakes an out-of-sample forecast evaluation of the methodology applied to the modelling of weekly exchange rate volatility. Our findings suggest that GETS specifications perform comparatively well in both ex post and ex ante forecasting as long as sufficient care is taken with respect to functional form and with respect to how the conditioning information is used. Also, our forecast comparison provides an example of a discrete time explanatory model being more accurate than realised volatility ex post in 1 step forecasting.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers RP with number -2234.

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Handle: RePEc:cor:louvrp:-2234

Note: In : International Journal of Forecasting, 26(4), 885-907, 2010
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Cited by:
  1. Genaro Sucarrat & Alvaro Escribano, 2009. "Automated financial multi-path GETS modelling," Economics Working Papers we093620, Universidad Carlos III, Departamento de Economía.
  2. Alvaro Escribano & Genaro Sucarrat, 2011. "Automated model selection in finance: General-to-speci c modelling of the mean and volatility speci cations," Working Papers, Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales 2011-09, Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales.
  3. Genaro Sucarrat & Alvaro Escribano, 2010. "The power log-GARCH model," Economics Working Papers we1013, Universidad Carlos III, Departamento de Economía.
  4. Cairns, Andrew J.G. & Blake, David & Dowd, Kevin & Coughlan, Guy D. & Epstein, David & Khalaf-Allah, Marwa, 2011. "Mortality density forecasts: An analysis of six stochastic mortality models," Insurance: Mathematics and Economics, Elsevier, vol. 48(3), pages 355-367, May.
  5. J. James Reade & Ulrich Volz, 2011. "From the General to the Specific," Discussion Papers, Department of Economics, University of Birmingham 11-18, Department of Economics, University of Birmingham.
  6. Chortareas, Georgios & Jiang, Ying & Nankervis, John. C., 2011. "Forecasting exchange rate volatility using high-frequency data: Is the euro different?," International Journal of Forecasting, Elsevier, Elsevier, vol. 27(4), pages 1089-1107, October.
  7. Sucarrat, Genaro & Grønneberg, Steffen & Escribano, Alvaro, 2013. "Estimation and Inference in Univariate and Multivariate Log-GARCH-X Models When the Conditional Density is Unknown," MPRA Paper 49344, University Library of Munich, Germany.
  8. Tennant, David, 2011. "Why do people risk exposure to Ponzi schemes? Econometric evidence from Jamaica," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 21(3), pages 328-346, July.

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