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Forecasting Stock Market Volatilities Using MIDAS Regressions: An Application to the Emerging Markets

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  • Alper, C. Emre
  • Fendoglu, Salih
  • Saltoglu, Burak

Abstract

We 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 Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 7460.

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Date of creation: Mar 2008
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Handle: RePEc:pra:mprapa:7460

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Keywords: Mixed Data Sampling regression model; Conditional volatility forecasting; Emerging Markets;

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  1. Francis X. Diebold & Robert S. Mariano, 1994. "Comparing Predictive Accuracy," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0169, National Bureau of Economic Research, Inc.
  2. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, Elsevier, vol. 31(3), pages 307-327, April.
  3. West, Kenneth D., 2006. "Forecast Evaluation," Handbook of Economic Forecasting, Elsevier, Elsevier.
  4. Ser-Huang Poon & Clive W.J. Granger, 2003. "Forecasting Volatility in Financial Markets: A Review," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 41(2), pages 478-539, June.
  5. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 2003. "Modeling and Forecasting Realized Volatility," Econometrica, Econometric Society, Econometric Society, vol. 71(2), pages 579-625, March.
  6. Eric Ghysels & Pedro Santa-Clara & Rossen Valkanov, 2004. "The MIDAS Touch: Mixed Data Sampling Regression Models," CIRANO Working Papers, CIRANO 2004s-20, CIRANO.
  7. Clements, Michael P & Galv√£o, Ana Beatriz, 2006. "Macroeconomic Forecasting with Mixed Frequency Data : Forecasting US output growth and inflation," The Warwick Economics Research Paper Series (TWERPS), University of Warwick, Department of Economics 773, University of Warwick, Department of Economics.
  8. Eric Ghysels & Pedro Santa-Clara & Rossen Valkanov, 2004. "Predicting Volatility: Getting the Most out of Return Data Sampled at Different Frequencies," CIRANO Working Papers, CIRANO 2004s-19, CIRANO.
  9. West, Kenneth D, 1996. "Asymptotic Inference about Predictive Ability," Econometrica, Econometric Society, Econometric Society, vol. 64(5), pages 1067-84, September.
  10. Mc Cracken, Michael W., 2000. "Robust out-of-sample inference," Journal of Econometrics, Elsevier, Elsevier, vol. 99(2), pages 195-223, December.
  11. McCracken, Michael W., 2004. "Parameter estimation and tests of equal forecast accuracy between non-nested models," International Journal of Forecasting, Elsevier, Elsevier, vol. 20(3), pages 503-514.
  12. Ghysels, Eric & Santa-Clara, Pedro & Valkanov, Rossen, 2004. "The MIDAS Touch: Mixed Data Sampling Regression Models," University of California at Los Angeles, Anderson Graduate School of Management, Anderson Graduate School of Management, UCLA qt9mf223rs, Anderson Graduate School of Management, UCLA.
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Cited by:
  1. Eric Ghysels & Andros Kourtellos & Elena Andreou, 2012. "Should macroeconomic forecasters use daily financial data and how?," 2012 Meeting Papers, Society for Economic Dynamics 1196, Society for Economic Dynamics.
  2. J. Isaac Miller, 2012. "Mixed-frequency Cointegrating Regressions with Parsimonious Distributed Lag Structures," Working Papers, Department of Economics, University of Missouri 1211, Department of Economics, University of Missouri.
  3. Anderson, Evan W. & Ghysels, Eric & Juergens, Jennifer L., 2009. "The impact of risk and uncertainty on expected returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 94(2), pages 233-263, November.
  4. Neville Francis, 2012. "The Low-Frequency Impact of Daily Monetary Policy Shock," 2012 Meeting Papers, Society for Economic Dynamics 198, Society for Economic Dynamics.
  5. Asgharian, Hossein & Hou, Ai Jun & Javed, Farrukh, 2013. "Importance of the macroeconomic variables for variance prediction A GARCH-MIDAS approach," Knut Wicksell Working Paper Series, Knut Wicksell Centre for Financial Studies, Lund University 2013/4, Knut Wicksell Centre for Financial Studies, Lund University.

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