Forecasting Realized Volatility of Agricultural Commodity Futures with Infinite Hidden Markov HAR Models

42 Pages Posted: 10 Aug 2019 Last revised: 27 Oct 2019

See all articles by Jiawen Luo

Jiawen Luo

South China University of Technology

Tony Klein

Queen's University Belfast - Queen's Management School

Qiang Ji

Chinese Academy of Sciences (CAS) - Institute of Policy and Management

Chenghan Hou

Hunan University - Center for Economics, Finance and Management Studies

Date Written: August 9, 2019

Abstract

We construct a set of HAR models with three types of infinite Hidden Markov regime switching structures. Particularly, jumps, leverage effects, and speculation effects are taken into account in realized volatility modeling. We forecast five agricultural commodity futures (Corn, Cotton, Indica Rice, Palm oil and Soybean) based on high frequency data from Chinese futures markets and evaluate the forecast performances with both statistical and economic evaluation measures. The statistical evaluation results suggest that HAR models with infinite Hidden Markov regime switching structures have better precision compared the benchmark HAR models based on the MZ-R², MAFE, and MCS results. The economic evaluation results suggest that portfolios constructed with infinite Hidden Markov regime switching HARs achieve higher portfolio returns for risk averse investors compared to benchmark HAR model for short-term volatility forecasts.

Keywords: Agriculture commodity futures, Realized volatility forecasts, Infinite Hidden Markov switching process, HAR models

JEL Classification: C52, G17, Q14

Suggested Citation

Luo, Jiawen and Klein, Tony and Ji, Qiang and Hou, Chenghan, Forecasting Realized Volatility of Agricultural Commodity Futures with Infinite Hidden Markov HAR Models (August 9, 2019). International Journal of Forecasting, Forthcoming; QMS Research Paper 2019/10. Available at SSRN: https://ssrn.com/abstract=3435054 or http://dx.doi.org/10.2139/ssrn.3435054

Jiawen Luo

South China University of Technology ( email )

Wushan
Guangzhou, AR Guangdong 510640
China

Tony Klein (Contact Author)

Queen's University Belfast - Queen's Management School ( email )

Riddel Hall
185 Stranmillis Road
Belfast, BT9 5EE
United Kingdom

HOME PAGE: http://www.tony-klein.info

Qiang Ji

Chinese Academy of Sciences (CAS) - Institute of Policy and Management ( email )

No.15 ZhongGuanCun BeiYiTiao Alley
Haidian District
Beijing, 100190
China

Chenghan Hou

Hunan University - Center for Economics, Finance and Management Studies ( email )

2 Lushan South Rd
Changsha, Hunan 410082
China

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