Forecasting Realized Volatility by Decomposition
AbstractForecasts of the realized volatility of the exchange rate returns of the Euro against the U.S. Dollar obtained directly and through decomposition are compared. Decomposing the realized volatility into its continuous sample path and jump components and modeling and forecasting them separately instead of directly forecasting the realized volatility is shown to lead to improved out-of-sample forecasts. Moreover, gains in forecast accuracy are robust with respect to the details of the decomposition.
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Bibliographic InfoPaper provided by European University Institute in its series Economics Working Papers with number ECO2006/20.
Date of creation: 2006
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Mixture model; Jump; Realized volatility; Gamma distribution;
Find related papers by JEL classification:
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- 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
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-09-11 (All new papers)
- NEP-ECM-2006-09-11 (Econometrics)
- NEP-ETS-2006-09-11 (Econometric Time Series)
- NEP-FIN-2006-09-11 (Finance)
- NEP-FMK-2006-09-11 (Financial Markets)
- NEP-FOR-2006-09-11 (Forecasting)
- NEP-MST-2006-09-11 (Market Microstructure)
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