Two are better than one: volatility forecasting using multiplicative component GARCH-MIDAS models

A preliminary version of this paper circulated under the title “On the Statistical Properties of Multiplicative GARCH Models” (2016)

58 Pages Posted: 21 Mar 2016 Last revised: 3 Apr 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: March 30, 2019

Abstract

We examine the properties and forecast performance of multiplicative volatility models that can be decomposed into a short- and a long-term component. Our leading example for such a model is the GARCH-MIDAS of Engle et al. (2013). We derive certain properties of multiplicative volatility models such as the kurtosis of returns, the autocorrelation function of squared returns, the R^2 of a Mincer-Zarnowitz regression and evaluate these models in a Monte-Carlo simulation. Most importantly, 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. For S&P 500 data, our results show that the GARCH-MIDAS based on housing starts as 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 (March 30, 2019). A preliminary version of this paper circulated under the title “On the Statistical Properties of Multiplicative GARCH Models” (2016). 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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