Forecasting Realized Volatility Using a Nonnegative Semiparametric Model

Journal of Risk and Financial Management, 2019

30 Pages Posted: 6 Sep 2019

See all articles by Anders Eriksson

Anders Eriksson

J.P. Morgan Chase & Co.

Daniel P. A. Preve

Singapore Management University

Jun Yu

Singapore Management University - School of Economics; Singapore Management University - Lee Kong Chian School of Business

Date Written: August 29, 2019

Abstract

This paper introduces a parsimonious and yet flexible semiparametric model to forecast financial volatility. The new model extends the linear nonnegative autoregressive model of Barndorff-Nielsen and Shephard (2001) and Nielsen and Shephard (2003) by way of a power transformation. It is semiparametric in the sense that the distributional and functional form of its error component is partially unspecified. The statistical properties of the model are discussed and a novel estimation method is proposed. Simulation studies validate the new method and suggest that it works reasonably well in finite samples. The out-of-sample forecasting performance of the proposed model is evaluated against a number of standard models, using data on S&P 500 monthly realized volatilities. Some commonly used loss functions are employed to evaluate the predictive accuracy of the alternative models. It is found that the new model generally generates highly competitive forecasts.

Keywords: Volatility forecasting, Realized volatility, Linear programming estimator, Tukey’s power transformation, Nonlinear nonnegative autoregression, Forecast comparisons

JEL Classification: C22, C51, C52, C53, C58

Suggested Citation

Eriksson, Anders and Preve, Daniel P. A. and Yu, Jun, Forecasting Realized Volatility Using a Nonnegative Semiparametric Model (August 29, 2019). Journal of Risk and Financial Management, 2019, Available at SSRN: https://ssrn.com/abstract=3445245

Anders Eriksson

J.P. Morgan Chase & Co. ( email )

60 Wall St.
New York, NY 10260
United States

Daniel P. A. Preve (Contact Author)

Singapore Management University ( email )

90 Stamford Road
Singapore, 178903
Singapore

Jun Yu

Singapore Management University - School of Economics ( email )

90 Stamford Road
178903
Singapore
+6568280858 (Phone)
+6568280833 (Fax)

HOME PAGE: http://www.mysmu.edu/faculty/yujun/

Singapore Management University - Lee Kong Chian School of Business ( email )

469 Bukit Timah Road
Singapore 912409
Singapore

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