Forecasting Stock Market Volatilities Using MIDAS Regressions: An Application to the Emerging Markets
AbstractWe explore the relative weekly stock market volatility forecasting performance of the linear univariate MIDAS regression model based on squared daily returns vis-a-vis the benchmark model of GARCH(1,1) for a set of four developed and ten emerging market economies. We first estimate the two models for the 2002-2007 period and compare their in-sample properties. Next we estimate the two models using the data on 2002-2005 period and then compare their out-of-sample forecasting performance for the 2006-2007 period, based on the corresponding mean squared prediction errors following the testing procedure suggested by West (2006). Our findings show that the MIDAS squared daily return regression model outperforms the GARCH model significantly in four of the emerging markets. Moreover, the GARCH model fails to outperform the MIDAS regression model in any of the emerging markets significantly. The results are slightly less conclusive for the developed economies. These results may imply superior performance of MIDAS in relatively more volatile environments.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 7460.
Date of creation: Mar 2008
Date of revision:
Mixed Data Sampling regression model; Conditional volatility forecasting; Emerging Markets;
Find related papers by JEL classification:
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-03-08 (All new papers)
- NEP-ECM-2008-03-08 (Econometrics)
- NEP-FMK-2008-03-08 (Financial Markets)
- NEP-FOR-2008-03-08 (Forecasting)
- NEP-RMG-2008-03-08 (Risk Management)
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