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A Mixture Multiplicative Error Model for Realized Volatility

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  • Markku Lanne

Abstract

A multiplicative error model with time-varying parameters and an error term following a mixture of gamma distributions is introduced. The model is fitted to the daily realized volatility series of Deutschemark/Dollar and Yen/Dollar returns and is shown to capture the conditional distribution of these variables better than the commonly used ARFIMA model. The forecasting performance of the new model is found to be, in general, superior to that of the set of volatility models recently considered by Andersen et al. (2003) for the same data.

Suggested Citation

  • Markku Lanne, 2006. "A Mixture Multiplicative Error Model for Realized Volatility," Economics Working Papers ECO2006/3, European University Institute.
    • Handle: RePEc:eui:euiwps:eco2006/3
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    More about this item

    Keywords

    Mixture model; Realized volatility; Gamma distribution;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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