A False Discovery Rate Approach to Optimal Volatility Forecasting Model Selection

41 Pages Posted: 12 Jan 2021 Last revised: 18 Jan 2022

See all articles by Arman Hassanniakalager

Arman Hassanniakalager

University of Bath - School of Management

Paul L Baker

University of Bath - School of Management

Emmanouil Platanakis

University of Bath - School of Management

Date Written: January 17, 2022

Abstract

Estimating financial market volatility is integral to the study of investment decisions and behaviour. Previous literature has therefore attempted to identify an optimal volatility forecasting model. However, optimal volatility forecasting is dynamic. It depends on the asset being studied and financial market conditions. We propose a novel empirical methodology to account for this dynamism. Using our Multiple Hypothesis Testing with False Discovery Rate (FDR) method, we identify buckets of superior performing models relative to the literature’s benchmark models. We present evidence that our proposed FDR bucket with GJR-GARCH has the lowest forecast error in predicting one-step-ahead realized volatility. We also compare our FDR method with two Family-Wise Error Rate model selection frameworks and the evidence supports our proposed FDR methodology.

Keywords: volatility forecasting, multiple hypothesis testing, false discovery rate, model selection, bootstrapping

JEL Classification: C12, C52, C58, G17

Suggested Citation

Hassanniakalager, Arman and Baker, Paul L and Platanakis, Emmanouil, A False Discovery Rate Approach to Optimal Volatility Forecasting Model Selection (January 17, 2022). Available at SSRN: https://ssrn.com/abstract=3737477 or http://dx.doi.org/10.2139/ssrn.3737477

Arman Hassanniakalager (Contact Author)

University of Bath - School of Management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom
+44(0)1225386170 (Phone)

HOME PAGE: http://researchportal.bath.ac.uk/en/persons/arman-hassanniakalager

Paul L Baker

University of Bath - School of Management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

HOME PAGE: http://researchportal.bath.ac.uk/en/persons/paul-baker

Emmanouil Platanakis

University of Bath - School of Management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

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