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Long memory versus structural breaks in modeling and forecasting realized volatility

  • Choi, Kyongwook
  • Yu, Wei-Choun
  • Zivot, Eric

We explore the possibility of structural breaks in the daily realized volatility of the Deutschemark/Dollar, Yen/Dollar and Yen/Deutschemark spot exchange rates with observed long memory behavior. We find that structural breaks in the mean can partly explain the persistence of realized volatility. We propose a VAR-RV-Break model that provides superior predictive ability when the timing of future breaks is known. With unknown break dates and sizes, we find that a VAR-RV-I(d) long memory model provides a robust forecasting method even when the true financial volatility series are generated by structural breaks.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 29 (2010)
Issue (Month): 5 (September)
Pages: 857-875

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Handle: RePEc:eee:jimfin:v:29:y:2010:i:5:p:857-875
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