Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/67768
Authors: 
Busch, Thomas
Christensen, Bent Jesper
Nielsen, Morten Ørregaard
Year of Publication: 
2008
Series/Report no.: 
Queen's Economics Department Working Paper 1181
Abstract: 
We study the forecasting of future realized volatility in the foreign exchange, stock, and bond markets from variables in the information set, including implied volatility backed out from option prices. Realized volatility is separated into its continuous and jump components, and the heterogeneous autoregressive (HAR) model is applied with implied volatility as an additional forecasting variable. A vector HAR (VecHAR) model for the resulting simultaneous system is introduced, controlling for possible endogeneity issues. We find that implied volatility contains incremental information about future volatility in all three markets, relative to past continuous and jump components, and it is an unbiased forecast in the foreign exchange and stock markets. Out-of-sample forecasting experiments confirm that implied volatility is important in forecasting future realized volatility components in all three markets. Perhaps surprisingly, the jump component is, to some extent, predictable, and options appear calibrated to incorporate information about future jumps in all three markets.
Subjects: 
bipower variation
HAR
Heterogeneous Autoregressive Model
implied volatility
jumps
options
realized volatility
VecHAR
volatility forecasting
JEL: 
C22
C32
F31
G1
Document Type: 
Working Paper

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