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A Time-varying Mixing Multiplicative Error Model for Realized Volatility Abstract: In this paper we model the dynamics of realized volatility as a Multiplicative Error Model with a mixture of distributions for the innovation term with time-varying mixing weights forced by past behavior of volatility. The mixture considers innovations as a source of time-varying volatility of volatility and is able to capture the right tail behavior of the distribution of volatility. The empirical results show that there is no substantial difference in the one-step ahead conditional expectations obtained according to various mixing schemes but that fixity of mixing weights may be a binding constraint in deriving accurate quantiles of the predicted distribution

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Paper provided by Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti" in its series Econometrics Working Papers Archive with number wp2010_03.

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Length: 21
Date of creation: Apr 2010
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Handle: RePEc:fir:econom:wp2010_03

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Keywords: Multiplicative Error Models; Realized Volatility; Mixture Distributions;

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  1. Lars Forsberg & Eric Ghysels, 2007. "Why Do Absolute Returns Predict Volatility So Well?," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 5(1), pages 31-67.
  2. Robert F. Engle & Giampiero M. Gallo, 2003. "A Multiple Indicators Model for Volatility Using Intra-Daily Data," NBER Working Papers 10117, National Bureau of Economic Research, Inc.
  3. Markku Lanne, 2006. "A Mixture Multiplicative Error Model for Realized Volatility," Economics Working Papers ECO2006/3, European University Institute.
  4. Robert F. Engle & Jeffrey R. Russell, 1998. "Autoregressive Conditional Duration: A New Model for Irregularly Spaced Transaction Data," Econometrica, Econometric Society, vol. 66(5), pages 1127-1162, September.
  5. Giovanni De Luca & Giampiero Gallo, 2006. "Time-varying Mixing Weights in Mixture Autoregressive Conditional Duration Models," Econometrics Working Papers Archive wp2006_12, Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti".
  6. Robert Engle, 2002. "New frontiers for arch models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(5), pages 425-446.
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Cited by:
  1. Christian T. Brownlees & Fabrizio Cipollini & Giampiero M. Gallo, 2011. "Multiplicative Error Models," Econometrics Working Papers Archive 2011_03, Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti", revised Apr 2011.

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