Statistical Surveillance of Volatility Forecasting Models
40 Pages Posted: 7 Mar 2011
Date Written: March 4, 2011
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
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