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Forecasting Sovereign Bond Realized Volatility Using Time-Varying Coefficients Model

Author

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  • Barbora Malinska

    (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic)

Abstract

This paper studies predictability of realized volatility of U.S. Treasury futures using high-frequency data for 2-year, 5-year, 10-year and 30-year tenors from 2006 to 2017. We extend heterogeneous autoregressive model by Corsi (2009) by higher-order realized moments and allow all model coefficients to be time-varying in order to explore dynamics in forecasting power of individual predictors across the term structure. We find realized kurtosis to be valuable predictor across the term structure with robust contribution also in out-of-sample analysis for the shorter tenors. Time-varying coefficient models are found to bring significant out-of-sample forecasting accuracy gain at the short end of the term structure. Further, we detect significant asymmetry in forecasting errors present for all the tenors as the constant-coefficient models were found to generate systemic under-predictions of future realized volatility.

Suggested Citation

  • Barbora Malinska, 2021. "Forecasting Sovereign Bond Realized Volatility Using Time-Varying Coefficients Model," Working Papers IES 2021/19, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jun 2021.
    • Handle: RePEc:fau:wpaper:wp2021_19
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    File URL: https://ies.fsv.cuni.cz/en/veda-vyzkum/working-papers/6441
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    More about this item

    Keywords

    Realized moments; Sovereign bonds; Volatility forecasting; High-frequency data; Time-varying coefficients;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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