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Out‐of‐sample volatility prediction: A new mixed‐frequency approach

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  • Yaojie Zhang
  • Feng Ma
  • Tianyi Wang
  • Li Liu

Abstract

This paper proposes a new mixed‐frequency approach to predict stock return volatilities out‐of‐sample. Based on the strategy of momentum of predictability (MoP), our mixed‐frequency approach has a model switching mechanism that switches between generalized autoregressive conditional heteroskedasticity (GARCH)‐class models that only use low‐frequency data and heterogeneous autoregressive models of realized volatility (HAR‐RV)‐type that only use high‐frequency data. The MoP model simply selects a forecast with relatively good past performance between the GARCH‐class and HAR‐RV‐type forecasts. The model confidence set (MCS) test shows that our MoP strategy significantly outperforms the competing models, which is robust to various settings. The MoP test shows that a relatively good recent past forecasting performance of the GARCH‐class or HAR‐RV‐type model is significantly associated with a relatively good current performance, supporting the success of the MoP model.

Suggested Citation

  • Yaojie Zhang & Feng Ma & Tianyi Wang & Li Liu, 2019. "Out‐of‐sample volatility prediction: A new mixed‐frequency approach," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 38(7), pages 669-680, November.
    • Handle: RePEc:wly:jforec:v:38:y:2019:i:7:p:669-680
    DOI: 10.1002/for.2590
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    Cited by:

    1. Zhang, Xiaoyun & Guo, Qiang, 2024. "How useful are energy-related uncertainty for oil price volatility forecasting?," Finance Research Letters, Elsevier, vol. 60(C).
    2. Lyócsa, Štefan & Todorova, Neda & Výrost, Tomáš, 2021. "Predicting risk in energy markets: Low-frequency data still matter," Applied Energy, Elsevier, vol. 282(PA).
    3. Liang, Chao & Ma, Feng & Li, Ziyang & Li, Yan, 2020. "Which types of commodity price information are more useful for predicting US stock market volatility?," Economic Modelling, Elsevier, vol. 93(C), pages 642-650.
    4. Chao Liang & Feng Ma & Lu Wang & Qing Zeng, 2021. "The information content of uncertainty indices for natural gas futures volatility forecasting," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 40(7), pages 1310-1324, November.
    5. Feng Ma & Chao Liang & Yuanhui Ma & M.I.M. Wahab, 2020. "Cryptocurrency volatility forecasting: A Markov regime‐switching MIDAS approach," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 39(8), pages 1277-1290, December.
    6. Zhang, Yaojie & Ma, Feng & Liao, Yin, 2020. "Forecasting global equity market volatilities," International Journal of Forecasting, Elsevier, vol. 36(4), pages 1454-1475.
    7. Liang, Chao & Luo, Qin & Li, Yan & Huynh, Luu Duc Toan, 2023. "Global financial stress index and long-term volatility forecast for international stock markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 88(C).
    8. Zhang, Yaojie & Lei, Likun & Wei, Yu, 2020. "Forecasting the Chinese stock market volatility with international market volatilities: The role of regime switching," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    9. Mengxi He & Xianfeng Hao & Yaojie Zhang & Fanyi Meng, 2021. "Forecasting stock return volatility using a robust regression model," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 40(8), pages 1463-1478, December.
    10. Li, Jiang-Cheng & Tao, Chen & Li, Hai-Feng, 2022. "Dynamic forecasting performance and liquidity evaluation of financial market by Econophysics and Bayesian methods," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 588(C).
    11. Yaojie Zhang & Yudong Wang & Feng Ma, 2021. "Forecasting US stock market volatility: How to use international volatility information," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 40(5), pages 733-768, August.
    12. Dai, Zhifeng & Zhu, Huan & Dong, Xiaodi, 2020. "Forecasting Chinese industry return volatilities with RMB/USD exchange rate," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 539(C).
    13. Chao Liang & Yu Wei & Yaojie Zhang, 2020. "Is implied volatility more informative for forecasting realized volatility: An international perspective," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 39(8), pages 1253-1276, December.
    14. Guo, Yangli & Li, Pan & Wu, Hanlin, 2023. "Jumps in the Chinese crude oil futures volatility forecasting: New evidence," Energy Economics, Elsevier, vol. 126(C).
    15. Jiqian Wang & Feng Ma & M.I.M. Wahab & Dengshi Huang, 2021. "Forecasting China's Crude Oil Futures Volatility: The Role of the Jump, Jumps Intensity, and Leverage Effect," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 40(5), pages 921-941, August.
    16. Zhang, Yaojie & Ma, Feng & Wei, Yu, 2019. "Out-of-sample prediction of the oil futures market volatility: A comparison of new and traditional combination approaches," Energy Economics, Elsevier, vol. 81(C), pages 1109-1120.
    17. Wang, Ping & Han, Wei & Huang, Chengcheng & Duong, Duy, 2022. "Forecasting realised volatility from search volume and overnight sentiment: Evidence from China," Research in International Business and Finance, Elsevier, vol. 62(C).
    18. Ding, Lili & Zhao, Zhongchao & Wang, Lei, 2022. "Probability density forecasts for natural gas demand in China: Do mixed-frequency dynamic factors matter?," Applied Energy, Elsevier, vol. 312(C).
    19. Qiao, Gaoxiu & Jiang, Gongyue & Yang, Jiyu, 2022. "VIX term structure forecasting: New evidence based on the realized semi-variances," International Review of Financial Analysis, Elsevier, vol. 82(C).
    20. Lyócsa, Štefan & Molnár, Peter & Výrost, Tomáš, 2021. "Stock market volatility forecasting: Do we need high-frequency data?," International Journal of Forecasting, Elsevier, vol. 37(3), pages 1092-1110.
    21. Feng He & Libo Yin, 2021. "Shocks to the equity capital ratio of financial intermediaries and the predictability of stock return volatility," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 40(6), pages 945-962, September.

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