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Volatility Forecasting: Downside Risk, Jumps and Leverage Effect

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  • Audrino, Francesco

    ()

  • Hu, Yujia

    ()

Abstract

We provide new empirical evidence on volatility forecasting in relation to asymmetries present in the dynamics of both return and volatility processes. Leverage and volatility feedback effects among continuous and jump components of the S&P500 price and volatility dynamics are examined using recently developed methodologies to detect jumps and to disentangle their size from continuous return and continuous volatility. Granted that jumps in both return and volatility are important components for generating the two effects, we find jumps in return can improve forecasts of volatility, while jumps in volatility improve volatility forecasts to a lesser extent. Moreover, disentangling jump and continuous variations into signed semivariances further improve the out-of-sample performance of volatility forecasting models, with negative jump semivariance being highly more informative then positive jump semivariance. The model proposed is able to capture many empirical stylized facts while still remaining parsimonious in terms of number of parameters to be estimated.

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File URL: http://www1.vwa.unisg.ch/RePEc/usg/econwp/EWP-1138.pdf
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Bibliographic Info

Paper provided by University of St. Gallen, School of Economics and Political Science in its series Economics Working Paper Series with number 1138.

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Length: 38 pages
Date of creation: Sep 2011
Date of revision:
Handle: RePEc:usg:econwp:2011:38

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Keywords: High frequency data; Realized volatility forecasting; Downside risk; Leverage effect;

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Cited by:
  1. Fengler, Matthias & Okhrin, Ostap, 2012. "Realized Copula," Economics Working Paper Series 1214, University of St. Gallen, School of Economics and Political Science.
  2. Fengler, Matthias R. & Mammen, Enno & Vogt, Michael, 2013. "Additive modeling of realized variance: tests for parametric specifications and structural breaks," Economics Working Paper Series 1332, University of St. Gallen, School of Economics and Political Science.

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