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A nonparametric approach to forecasting realized volatility

Author

Listed:
  • Adam Clements

    (QUT)

  • Ralf Becker

    (Manchester)

Abstract

A well developed literature exists in relation to modeling and forecasting asset return volatility. Much of this relate to the development of time series models of volatility. This paper proposes an alternative method for forecasting volatility that does not involve such a model. Under this approach a forecast is a weighted average of historical volatility. The greatest weight is given to periods that exhibit the most similar market conditions to the time at which the forecast is being formed. Weighting occurs by comparing short-term trends in volatility across time (as a measure of market conditions) by the application of a multivariate kernel scheme. It is found that at a 1 day forecast horizon, the proposed method produces forecasts that are significantly more accurate than competing approaches.

Suggested Citation

  • Adam Clements & Ralf Becker, 2009. "A nonparametric approach to forecasting realized volatility," NCER Working Paper Series 43, National Centre for Econometric Research.
    • Handle: RePEc:qut:auncer:2009_56
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    File URL: http://www.ncer.edu.au/papers/documents/WPNo43.pdf
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    References listed on IDEAS

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    7. Ghysels, Eric & Santa-Clara, Pedro & Valkanov, Rossen, 2006. "Predicting volatility: getting the most out of return data sampled at different frequencies," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 59-95.
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    Cited by:

    1. Lahaye, Jerome & Shaw, Philip, 2014. "Can we reject linearity in an HAR-RV model for the S&P 500? Insights from a nonparametric HAR-RV," Economics Letters, Elsevier, vol. 125(1), pages 43-46.

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    More about this item

    Keywords

    Volatility; forecasts; forecast evaluation; model confidence set; nonparametric;
    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
    • G00 - Financial Economics - - General - - - General

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