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Exponential GARCH Modeling with Realized Measures of Volatility

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  • Peter Reinhard Hansen
  • Zhuo Huang

Abstract

We introduce the Realized Exponential GARCH model that can utilize multiple realized volatility measures for the modeling of a return series. The model specifies the dynamic properties of both returns and realized measures, and is characterized by a flexible modeling of the dependence between returns and volatility. We apply the model to DJIA stocks and an exchange traded fund that tracks the S&P 500 index and find that specifications with multiple realized measures dominate those that rely on a single realized measure. The empirical analysis suggests some convenient simplifications and highlights the advantages of the new specification.

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Bibliographic Info

Paper provided by European University Institute in its series Economics Working Papers with number ECO2012/26.

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Date of creation: 2012
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Handle: RePEc:eui:euiwps:eco2012/26

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Related research

Keywords: EGARCH; High Frequency Data; Realized Variance; Leverage Effect;

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References

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  1. Ole E. Barndorff-Nielsen & Peter Reinhard Hansen & Asger Lunde & Neil Shephard, 2006. "Designing realised kernels to measure the ex-post variation of equity prices in the presence of noise," Economics Papers 2006-W03, Economics Group, Nuffield College, University of Oxford.
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  3. Robert F. Engle & Giampiero M. Gallo, 2003. "A Multiple Indicators Model For Volatility Using Intra-Daily Data," Econometrics Working Papers Archive wp2003_07, Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti".
  4. Andersen, Torben G & Bollerslev, Tim, 1998. "Answering the Skeptics: Yes, Standard Volatility Models Do Provide Accurate Forecasts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 885-905, November.
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  8. Lan Zhang & Per A. Mykland & Yacine Ait-Sahalia, 2003. "A Tale of Two Time Scales: Determining Integrated Volatility with Noisy High Frequency Data," NBER Working Papers 10111, National Bureau of Economic Research, Inc.
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  11. Fabrizio Cipollini & Robert F. Engle & Giampiero M. Gallo, 2007. "A Model for Multivariate Non-negative Valued Processes in Financial Econometrics," Econometrics Working Papers Archive wp2007_16, Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti".
  12. Makoto Takahashi & Yasuhiro Omori & Toshiaki Watanabe, 2007. "Estimating Stochastic Volatility Models Using Daily Returns and Realized Volatility Simultaneously," CIRJE F-Series CIRJE-F-515, CIRJE, Faculty of Economics, University of Tokyo.
  13. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 2003. "Modeling and Forecasting Realized Volatility," Econometrica, Econometric Society, vol. 71(2), pages 579-625, March.
  14. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
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  19. Peter Reinhard Hansen & Zhuo Huang & Howard Howan Shek, 2012. "Realized GARCH: a joint model for returns and realized measures of volatility," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 27(6), pages 877-906, 09.
  20. O. E. Barndorff-Nielsen & P. Reinhard Hansen & A. Lunde & N. Shephard, 2009. "Realized kernels in practice: trades and quotes," Econometrics Journal, Royal Economic Society, vol. 12(3), pages C1-C32, November.
  21. Kristensen Dennis & Rahbek Anders, 2009. "Asymptotics of the QMLE for Non-Linear ARCH Models," Journal of Time Series Econometrics, De Gruyter, vol. 1(1), pages 1-38, April.
  22. Christensen, Kim & Podolskij, Mark, 2007. "Realized range-based estimation of integrated variance," Journal of Econometrics, Elsevier, vol. 141(2), pages 323-349, December.
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Cited by:
  1. Asger Lunde & Kasper V. Olesen, 2013. "Modeling and Forecasting the Volatility of Energy Forward Returns - Evidence from the Nordic Power Exchange," CREATES Research Papers 2013-19, School of Economics and Management, University of Aarhus.
  2. Peter Reinhard Hansen & Asger Lunde & Valeri Voev, 2012. "Realized Beta GARCH: Multivariate GARCH Model with Realized Measures of Volatility and CoVolatility," Economics Working Papers ECO2012/28, European University Institute.

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