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Modeling and Forecasting the Volatility of the Nikkei 225 Realized Volatility Using the ARFIMA-GARCH Model

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  • Isao Ishida
  • Toshiaki Watanabe

Abstract

In this paper, we apply the ARFIMA-GARCH model to the realized volatility and the continuous sample path variations constructed from high-frequency Nikkei 225 data. While the homoskedastic ARFIMA model performs excellently in predicting the Nikkei 225 realized volatility time series and their square-root and log transformations, the residuals of the model suggest presence of strong conditional heteroskedasticity similar to the finding of Corsi et al. (2007) for the realized S&P 500 futures volatility. An ARFIMA model augmented by a GARCH(1,1) specification for the error term largely captures this and substantially improves the fit to the data. In a multi-day forecasting setting, we also find some evidence of predictable time variation in the volatility of the Nikkei 225 volatility captured by the ARFIMA-GARCH model.

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Paper provided by Institute of Economic Research, Hitotsubashi University in its series Global COE Hi-Stat Discussion Paper Series with number gd08-032.

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Date of creation: Feb 2009
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Handle: RePEc:hst:ghsdps:gd08-032

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Keywords: ARFIMA-GARCH; Volatility of realized volatility; Realized bipower variation; Jump detection; BDS test; Hong-Li test; High-frequency Nikkei 225 data;

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