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Estimating stochastic volatility: the rough side to equity returns

Author

Listed:
  • Jonathan Haynes

    (Barcelona Graduate School of Economics
    Oxera Consulting LLP)

  • Daniel Schmitt

    (Barcelona Graduate School of Economics)

  • Lukas Grimm

    (Barcelona Graduate School of Economics)

Abstract

This paper evaluates the forecasting performance of a Brownian semi-stationary (BSS) process in modelling the volatility of 21 equity indices. We implement a hybrid scheme to simulate BSS processes with high efficiency and precision. These simulations are useful to price derivatives, accounting for rough volatility. We then calibrate the BSS parameters for the realised kernel of 21 equity indices, using data from the Oxford-Man Institute. Finally, we conduct one-step and ten-step ahead forecasts on six indices and find that the BSS outperforms benchmarks, including a Log-HAR specification, in most cases.

Suggested Citation

  • Jonathan Haynes & Daniel Schmitt & Lukas Grimm, 2019. "Estimating stochastic volatility: the rough side to equity returns," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 42(2), pages 449-469, December.
    • Handle: RePEc:spr:decfin:v:42:y:2019:i:2:d:10.1007_s10203-019-00261-y
    DOI: 10.1007/s10203-019-00261-y
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    References listed on IDEAS

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    Cited by:

    1. Elisa Alòs & Maria Elvira Mancino & Tai-Ho Wang, 2019. "Volatility and volatility-linked derivatives: estimation, modeling, and pricing," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 42(2), pages 321-349, December.

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    More about this item

    Keywords

    Asset pricing; Stochastic processes; Forecasting; Volatility; Derivatives;
    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
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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