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Modeling and Forecasting the Volatility of the Nikkei 225 Realized Volatility Using the ARFIMA-GARCH Model

  • Isao Ishida

    (Faculty of Economics and Graduate School of Public Policy, University of Tokyo)

  • Toshiaki Watanabe

    (Institute of Economic Research, Hitotsubashi University)

In this paper, we apply the ARFIMA-GARCH model to the realized volatility and the continuous sample path variations constructed from high-frequency Nikkei 225 data. While the homoskedastic ARFIMA model performs excellently in predicting the Nikkei 225 realized volatility time series and their square-root and log transformations, the residuals of the model suggest presence of strong conditional heteroskedasticity similar to the finding of Corsi et al. (2007) for the realized S&P 500 futures volatility. An ARFIMA model augmented by a GARCH(1,1) specification for the error term largely captures this and substantially improves the fit to the data. In a multi-day forecasting setting, we also find some evidence of predictable time variation in the volatility of the Nikkei 225 volatility captured by the ARFIMA-GARCH model.

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Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-608.

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Length: 32pages
Date of creation: Jan 2009
Date of revision:
Handle: RePEc:tky:fseres:2009cf608
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