Two Are Better Than One: Volatility Forecasting Using Multiplicative Component GARCH-MIDAS Models

Journal of Applied Econometrics, Forthcoming

68 Pages Posted: 21 Mar 2016 Last revised: 21 Aug 2019

See all articles by Christian Conrad

Christian Conrad

Heidelberg University - Faculty of Economics and Social Studies

Onno Kleen

Heidelberg University - Department of Economics

Date Written: August 14, 2019

Abstract

We examine the properties and forecast performance of multiplicative volatility specifications that belong to the class of GARCH-MIDAS models suggested in Engle et al. (2013). In those models volatility is decomposed into a short-term GARCH component and a long-term component that is driven by an explanatory variable. We derive the kurtosis of returns, the autocorrelation function of squared returns, and the R^2 of a Mincer-Zarnowitz regression and evaluate these models in a Monte-Carlo simulation. For S&P 500 data, we compare the forecast performance of GARCH-MIDAS models with a wide range of competitor models such as HAR, Realized GARCH, HEAVY and Markov-Switching GARCH. Our results show that the GARCH-MIDAS based on housing starts as an explanatory variable significantly outperforms all competitor models at forecast horizons of two and three months ahead.

Keywords: Forecast Evaluation, GARCH-MIDAS, Mincer-Zarnowitz Regression, Volatility Persistence, Volatility Component Model, Long-Term Volatility, Model Confidence Set

JEL Classification: C53, C58, G12

Suggested Citation

Conrad, Christian and Kleen, Onno, Two Are Better Than One: Volatility Forecasting Using Multiplicative Component GARCH-MIDAS Models (August 14, 2019). Journal of Applied Econometrics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2752354 or http://dx.doi.org/10.2139/ssrn.2752354

Christian Conrad (Contact Author)

Heidelberg University - Faculty of Economics and Social Studies ( email )

Bergheimer Strasse 58
Heidelberg, D-69115
Germany
+49 (0)6221 54 3173 (Phone)

HOME PAGE: http://www.uni-heidelberg.de/conrad

Onno Kleen

Heidelberg University - Department of Economics ( email )

Bergheimer Strasse 58
Heidelberg, BW 69115
Germany

HOME PAGE: http://onnokleen.de

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