Do Jumps Matter for Volatility Forecasting? Evidence from Energy Markets

Journal of Futures Markets, Vol. 36, No. 8, 2016

81 Pages Posted: 28 Aug 2015 Last revised: 22 Mar 2019

See all articles by Marcel Prokopczuk

Marcel Prokopczuk

Leibniz Universit├Ąt Hannover - Faculty of Economics and Management; University of Reading - ICMA Centre

Lazaros Symeonidis

University of East Anglia (UEA) - Norwich Business School

Chardin Wese Simen

University of Liverpool Management School

Date Written: August 22, 2015

Abstract

This paper characterizes the dynamics of jumps and analyzes their importance for volatility forecasting. Using high-frequency data on four prominent energy markets, we perform a model-free decomposition of realized variance into its continuous and discontinuous components. We find strong evidence of jumps in energy markets between 2007 and 2012. We then investigate the importance of jumps for volatility forecasting. To this end, we estimate and analyze the predictive ability of several Heterogenous Autoregressive (HAR) models that explicitly capture the dynamics of jumps. Conducting extensive in sample and out-of-sample analyses, we establish that explicitly modeling jumps does not significantly improve forecast accuracy. Our results are broadly consistent across our four energy markets, forecasting horizons and loss functions.

Keywords: Realized volatility, jumps, high-frequency data, volatility forecasting, forecast evaluation

JEL Classification: C1, C53, C58, G1, G13

Suggested Citation

Prokopczuk, Marcel and Symeonidis, Lazaros and Wese Simen, Chardin, Do Jumps Matter for Volatility Forecasting? Evidence from Energy Markets (August 22, 2015). Journal of Futures Markets, Vol. 36, No. 8, 2016. Available at SSRN: https://ssrn.com/abstract=2651076

Marcel Prokopczuk

Leibniz Universit├Ąt Hannover - Faculty of Economics and Management ( email )

Koenigsworther Platz 1
Hannover, 30167
Germany

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

Lazaros Symeonidis (Contact Author)

University of East Anglia (UEA) - Norwich Business School ( email )

Norwich
NR4 7TJ
United Kingdom

Chardin Wese Simen

University of Liverpool Management School ( email )

Management School
University of Liverpool
Liverpool, L69 7ZH
United Kingdom

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