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

Erasmus University Rotterdam (EUR); 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)

Erasmus University Rotterdam (EUR) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1253 (Phone)
+31 10 408 9162 (Fax)

Robeco Asset Management ( email )

Rotterdam, 3011 AG
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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