Nonparametric Estimation and Forecasting for Time-Varying Coefficient Realized Volatility Models

TY - JOUR

T1 - Nonparametric Estimation and Forecasting for Time-Varying Coefficient Realized Volatility Models

AU - Xiangjin B., Chen,

AU - Gao, Jiti

AU - Li, Degui

AU - Silvapulle, P.

N1 - This is an author-produced version of the published paper. Uploaded in accordance with the publisher’s self-archiving policy. Further copying may not be permitted; contact the publisher for details

PY - 2018/1

Y1 - 2018/1

N2 - This paper introduces a new specification for the heterogeneous autoregressive (HAR) model for the realized volatility of S&P 500 index returns. In this modelling framework, the coefficients of the HAR are allowed to be time-varying with unspecified functional forms. The local linear method with the cross-validation (CV) bandwidth selection is applied to estimate the time-varying coefficient HAR (TVC-HAR) model, and a bootstrap method is used to construct the point-wise confidence bands for the coefficient functions. Furthermore, the asymptotic distribution of the proposed local linear estimators of the TVC-HAR model is established under some mild conditions. The results of the simulation study show that the local linear estimator with CV bandwidth selection has favorable finite sample properties. The outcomes of the conditional predictive ability test indicate that the proposed nonparametric TVC-HAR model outperforms the parametric HAR and its extension to HAR with jumps and/or GARCH in terms of multi-step out-of-sample forecasting, in particular in the post-2003 crisis and 2007 GFC periods, during which financial market volatilities were unduly high.

AB - This paper introduces a new specification for the heterogeneous autoregressive (HAR) model for the realized volatility of S&P 500 index returns. In this modelling framework, the coefficients of the HAR are allowed to be time-varying with unspecified functional forms. The local linear method with the cross-validation (CV) bandwidth selection is applied to estimate the time-varying coefficient HAR (TVC-HAR) model, and a bootstrap method is used to construct the point-wise confidence bands for the coefficient functions. Furthermore, the asymptotic distribution of the proposed local linear estimators of the TVC-HAR model is established under some mild conditions. The results of the simulation study show that the local linear estimator with CV bandwidth selection has favorable finite sample properties. The outcomes of the conditional predictive ability test indicate that the proposed nonparametric TVC-HAR model outperforms the parametric HAR and its extension to HAR with jumps and/or GARCH in terms of multi-step out-of-sample forecasting, in particular in the post-2003 crisis and 2007 GFC periods, during which financial market volatilities were unduly high.

U2 - 10.1080/07350015.2016.1138118

DO - 10.1080/07350015.2016.1138118

M3 - Article

SN - 0735-0015

SP - 1

EP - 13

JO - Journal of Business and Economic Statistics

JF - Journal of Business and Economic Statistics

ER -