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Forecasting Trading-Session Return Volatility in Taiwan Futures Market: A Periodic Regime Switching with Jump Approach

Author

Listed:
  • Yi-Hao Lai

    (Dayeh University)

  • Yi-Chiuan Wang

    (Tunghai University)

  • Yu-Ching Chang

    (Providence University)

Abstract

This study develops a novel periodic regime-switching model (the PRS model) to improve the forecasting of stock market volatility by accounting for the information from non-trading and trading periods, including regular trading and after-hour trading. Empirical analysis of the Taiwan Futures Exchange (TAIFEX) demonstrates the significant improvements of the PRS model in both in-sample and out-of-sample periods. Our results also show that the introduction of after-hour trading sessions has provided valuable information for volatility forecasting in subsequent regular trading sessions, emphasizing the importance of considering diverse information flows across different trading and non-trading times. The PRS model effectively captures the dynamics of non-trading and trading sessions and the influence of unusual news arrivals and jumps on market volatility, contributing to investment and risk management strategies.

Suggested Citation

  • Yi-Hao Lai & Yi-Chiuan Wang & Yu-Ching Chang, 2024. "Forecasting Trading-Session Return Volatility in Taiwan Futures Market: A Periodic Regime Switching with Jump Approach," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 31(2), pages 285-305, June.
    • Handle: RePEc:kap:apfinm:v:31:y:2024:i:2:d:10.1007_s10690-023-09415-w
    DOI: 10.1007/s10690-023-09415-w
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    More about this item

    Keywords

    Volatility forecasting; Periodic regime switching model; Out-of-sample; Jump process;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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