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Forecasting realized volatility: The role of implied volatility, leverage effect, overnight returns, and volatility of realized volatility

Dimos S. Kambouroudis, David G. McMillan, Katerina Tsakou Orcid Logo

Journal of Futures Markets, Volume: 41, Issue: 10, Pages: 1618 - 1639

Swansea University Author: Katerina Tsakou Orcid Logo

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DOI (Published version): 10.1002/fut.22241

Abstract

We forecast realized volatility extending the heterogeneous autoregressive model (HAR) to include implied volatility (IV), the leverage effect, overnight returns, and the volatility of realized volatility. We analyze 10 international stock indices finding that, although a simple HAR model augmented...

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Published in: Journal of Futures Markets
ISSN: 0270-7314 1096-9934
Published: Wiley 2021
Online Access: Check full text

URI: https://cronfa.swan.ac.uk/Record/cronfa57115
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Abstract: We forecast realized volatility extending the heterogeneous autoregressive model (HAR) to include implied volatility (IV), the leverage effect, overnight returns, and the volatility of realized volatility. We analyze 10 international stock indices finding that, although a simple HAR model augmented with IV (HAR-IV) is more accurate than any HAR model excluding it, all markets support further extensions of the HAR-IV model. More accurate forecasts are found using overnight returns in all markets except the UK, the volatility of realized volatility in the US, and the leverage effect in five markets. A value-at-risk exercise supports the economic significance of our findings.
Keywords: HAR modeling and forecasting, implied volatility indices, leverage effect, overnight returns,realized volatility
College: School of Management
Issue: 10
Start Page: 1618
End Page: 1639