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The long memory HEAVY process: modeling and forecasting financial volatility

Author

Listed:
  • M. Karanasos

    (Brunel University London)

  • S. Yfanti

    (Loughborough University)

  • A. Christopoulos

    (National and Kapodistrian University of Athens)

Abstract

This paper studies the bivariate HEAVY system of volatility regression equations and its various extensions that are directly applicable to the day-to-day business treasury operations of trading in foreign exchange and commodities, investing in bond and stock markets, hedging out market risk, and capital budgeting. We enrich the HEAVY framework with powers, asymmetries, and long memory that improve its forecasting accuracy significantly. Other findings are as follows. First, hyperbolic memory fits the realized measure better, whereas fractional integration is more suitable for the powered returns. Second, the structural breaks applied to the bivariate system capture the time-varying behavior of the parameters, in particular during and after the global financial crisis of 2007/2008.

Suggested Citation

  • M. Karanasos & S. Yfanti & A. Christopoulos, 2021. "The long memory HEAVY process: modeling and forecasting financial volatility," Annals of Operations Research, Springer, vol. 306(1), pages 111-130, November.
    • Handle: RePEc:spr:annopr:v:306:y:2021:i:1:d:10.1007_s10479-019-03493-8
    DOI: 10.1007/s10479-019-03493-8
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    Cited by:

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    More about this item

    Keywords

    Asymmetries; Financial crisis; Forecasting; HEAVY model; High-frequency data; Long memory; Power transformations; Realized variance; Risk management; Structural breaks;
    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
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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