Statistical Surveillance of Volatility Forecasting Models

40 Pages Posted: 7 Mar 2011

See all articles by Vasyl Golosnoy

Vasyl Golosnoy

Ruhr University of Bochum

Iryna Okhrin

affiliation not provided to SSRN

Wolfgang Schmid

Europa-Universitaet Viadrina

Date Written: March 4, 2011

Abstract

This paper elaborates sequential procedures for monitoring the validity of a volatility model. A state space representation describes dynamics of daily integrated volatility. The observation equation relates the integrated volatility to its measures such as the realized volatility or bipower variation. On-line control procedures, based on volatility forecasting errors, allow us to decide whether the chosen representation remains correctly specified. A signal indicates that the assumed volatility model may no longer be valid. The performance of our approach is analyzed within a Monte Carlo simulation study and illustrated in an empirical application for selected US stocks.

Keywords: Control charts, Integrated volatility, Jumps, Realized volatility, State space model

JEL Classification: C22, C53, G17

Suggested Citation

Golosnoy, Vasyl and Okhrin, Iryna and Schmid, Wolfgang, Statistical Surveillance of Volatility Forecasting Models (March 4, 2011). Available at SSRN: https://ssrn.com/abstract=1777443 or http://dx.doi.org/10.2139/ssrn.1777443

Vasyl Golosnoy

Ruhr University of Bochum ( email )

Universit├Ątsstra├če 150
Bochum, NRW 44780
Germany

Iryna Okhrin

affiliation not provided to SSRN ( email )

Wolfgang Schmid (Contact Author)

Europa-Universitaet Viadrina ( email )

Grosse Scharrnstr. 59
Department of Statistics
D-15230 Frankfurt (Oder)
Germany

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