Quantile Forecast Combinations in Realised Volatility Prediction

Abstract

This paper tests whether it is possible to improve point, quantile and density forecasts of realized volatility by conditioning on macroeconomic and financial variables. We employ quantile autoregressive models augmented with a plethora of macroeconomic and financial variables. Complete subset combinations of both linear and quantile forecasts enable us to efficiently summarise the information content in the candidate predictors. Our findings suggest that no single variable is able to provide more information for the evolution of the volatility distribution beyond that contained in its own past. The best performing variable is the return on the stock market followed by the inflation rate. Our complete subset approach achieves superior quantile, density and point predictive performance relative to the univariate models and the autoregressive benchmark.

Keywords: Forecasting, Realised volatility, Forecast combination, Predictive quantile regression, Subset quantile regressions

JEL Classification: G12, G22, C22, C53