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Forecasting Daily Volatility of Stock Price Index Using Daily Returns and Realized Volatility

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  • Takahashi, Makoto
  • Watanabe, Toshiaki
  • Omori, Yasuhiro

Abstract

This paper compares the volatility predictive abilities of some time-varying volatility models such as thestochastic volatility (SV) and exponential GARCH (EGARCH) models using daily returns, the heterogeneous au-toregressive (HAR) model using daily realized volatility (RV) and the realized SV (RSV) and realized EGARCH(REGARCH) models using the both. The data are the daily return and RV of Dow Jones Industrial Aver-age (DJIA) in US and Nikkei 225 (N225) in Japan. All models are extended to accommodate the well-knownphenomenon in stock markets of a negative correlation between today's return and tomorrow's volatility. Weestimate the HAR model by the ordinary least squares (OLS) and the EGARCH and REGARCH models bythe quasi-maximum likelihood (QML) method. Since it is not straightforward to evaluate the likelihood of theSV and RSV models, we apply a Bayesian estimation via Markov chain Monte Carlo (MCMC) to them. Byconducting predictive ability tests and analyses based on model confidence sets, we confirm that the models us-ing RV outperform the models without RV, that is, the RV provides useful information on forecasting volatility.Moreover, we find that the realized SV model performs best and the HAR model can compete with it. Thecumulative loss analysis suggests that the differences of the predictive abilities among the models are partlycaused by the rise of volatility.

Suggested Citation

  • Takahashi, Makoto & Watanabe, Toshiaki & Omori, Yasuhiro, 2021. "Forecasting Daily Volatility of Stock Price Index Using Daily Returns and Realized Volatility," Discussion paper series HIAS-E-104, Hitotsubashi Institute for Advanced Study, Hitotsubashi University.
  • Handle: RePEc:hit:hiasdp:hias-e-104
    Note: January 4, 2021
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    Cited by:

    1. Yuta Kurose, 2021. "Stochastic volatility model with range-based correction and leverage," Papers 2110.00039, arXiv.org, revised Oct 2021.
    2. Roman V. Ivanov, 2023. "On the Stochastic Volatility in the Generalized Black-Scholes-Merton Model," Risks, MDPI, vol. 11(6), pages 1-23, June.
    3. Watanabe, Toshiaki & Nakajima, Jouchi, 2023. "High-frequency realized stochastic volatility model," Discussion paper series HIAS-E-127, Hitotsubashi Institute for Advanced Study, Hitotsubashi University.
    4. Omar Abbara & Mauricio Zevallos, 2022. "Maximum Likelihood Inference for Asymmetric Stochastic Volatility Models," Econometrics, MDPI, vol. 11(1), pages 1-18, December.

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    More about this item

    Keywords

    Exponential GARCH (EGARCH) model; Heterogeneous autoregressive (HAR) model; Markov chain Monte Carlo (MCMC); Realized volatility; Stochastic volatility; Volatility forecasting;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • 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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