Volatility or Higher Moments: Which is More Important in Return Density Forecasts of Stochastic Volatility Model?

22 Pages Posted: 13 Mar 2024

See all articles by Chenxing Li

Chenxing Li

Hunan University - Center for Economics, Finance and Management Studies

Zehua Zhang

Hunan University

Ran Zhao

San Diego State University

Abstract

Extensions of the stochastic volatility (SV) model focus on either improving volatility inference or modeling higher moments of the return distribution. This study investigates which extension can better improve return density forecasts. By examining various specifications with S&P 500 daily returns for nearly 20 years, we find that a more accurate capture of volatility dynamics with realized volatility and implied volatility is more important than modeling higher moments for a conventional SV model in terms of both density and tail forecasts. The accuracy of volatility estimation and forecasts should be the precondition for higher moment extensions.

Keywords: Stochastic volatility, realized volatility, implied volatility, MCMC, density forecast

Suggested Citation

Li, Chenxing and Zhang, Zehua and Zhao, Ran, Volatility or Higher Moments: Which is More Important in Return Density Forecasts of Stochastic Volatility Model?. Available at SSRN: https://ssrn.com/abstract=4757295 or http://dx.doi.org/10.2139/ssrn.4757295

Chenxing Li

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

2 Lushan South Rd
Changsha, Hunan 410082
China

Zehua Zhang (Contact Author)

Hunan University ( email )

Lushan Road, Yuelu District
Changsha, Hunan
China

Ran Zhao

San Diego State University ( email )

San Diego, CA 92182-0763
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
15
Abstract Views
103
PlumX Metrics