Modeling and Forecasting S&P 500 Volatility: Long Memory, Structural Breaks and Nonlinearity

Tinbergen Institute Discussion Paper No. 04-067/4

43 Pages Posted: 24 Jun 2004

See all articles by Martin Martens

Martin Martens

Robeco Asset Management

Michiel De Pooter

Board of Governors of the Federal Reserve System

Dick J. C. van Dijk

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute; ERIM

Date Written: June 2004

Abstract

The sum of squared intraday returns provides an unbiased and almost error-free measure of ex-post volatility. In this paper we develop a nonlinear Autoregressive Fractionally Integrated Moving Average (ARFIMA) model for realized volatility, which accommodates level shifts, day-of-the-week effects, leverage effects and volatility level effects. Applying the model to realized volatilities of the S&P 500 stock index and three exchange rates produces forecasts that clearly improve upon the ones obtained from a linear ARFIMA model and from conventional time-series models based on daily returns, treating volatility as a latent variable.

Keywords: Realized volatility, high-frequency data, long memory, day-of-the-week effect, leverage effect, volatility forecasting, smooth transition

JEL Classification: C22, C53, G15

Suggested Citation

Martens, Martin P.E. and De Pooter, Michiel and van Dijk, Dick J.C., Modeling and Forecasting S&P 500 Volatility: Long Memory, Structural Breaks and Nonlinearity (June 2004). Tinbergen Institute Discussion Paper No. 04-067/4, Available at SSRN: https://ssrn.com/abstract=557746 or http://dx.doi.org/10.2139/ssrn.557746

Martin P.E. Martens (Contact Author)

Robeco Asset Management ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

Michiel De Pooter

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Dick J.C. Van Dijk

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute

P.O. Box 1738
3000 DR Rotterdam
Netherlands

ERIM ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1263 (Phone)
+31 10 4089162 (Fax)

HOME PAGE: http://people.few.eur.nl/djvandijk

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