Modeling and forecasting exchange rate volatility in time-frequency domain

DOI10.1016/J.EJOR.2015.12.010zbMATH Open1346.62101arXiv1204.1452OpenAlexW2911676950MaRDI QIDQ322677FDOQ322677

Authors: Jozef Barunik, Tomas Krehlik, Lukas Vacha 

Publication date: 7 October 2016

Published in: European Journal of Operational Research (Search for Journal in Brave)

Abstract: This paper proposes an enhanced approach to modeling and forecasting volatility using high frequency data. Using a forecasting model based on Realized GARCH with multiple time-frequency decomposed realized volatility measures, we study the influence of different timescales on volatility forecasts. The decomposition of volatility into several timescales approximates the behaviour of traders at corresponding investment horizons. The proposed methodology is moreover able to account for impact of jumps due to a recently proposed jump wavelet two scale realized volatility estimator. We propose a realized Jump-GARCH models estimated in two versions using maximum likelihood as well as observation-driven estimation framework of generalized autoregressive score. We compare forecasts using several popular realized volatility measures on foreign exchange rate futures data covering the recent financial crisis. Our results indicate that disentangling jump variation from the integrated variation is important for forecasting performance. An interesting insight into the volatility process is also provided by its multiscale decomposition. We find that most of the information for future volatility comes from high frequency part of the spectra representing very short investment horizons. Our newly proposed models outperform statistically the popular as well conventional models in both one-day and multi-period-ahead forecasting.

Full work available at URL: https://arxiv.org/abs/1204.1452

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zbMATH Keywords

jumpsmulti-period-ahead volatility forecastingrealized GARCHwavelet decomposition

Mathematics Subject Classification ID

Time series, auto-correlation, regression, etc. in statistics (GARCH) (62M10) Inference from stochastic processes and prediction (62M20) Applications of statistics to actuarial sciences and financial mathematics (62P05)

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Cited In (21)

• Volatility forecasting of financial time series using wavelet based exponential generalized autoregressive conditional heteroscedasticity model
• MODELING HIGH-FREQUENCY FOREIGN EXCHANGE DATA DYNAMICS
• A neural network enhanced volatility component model
• A wavelet-based approach for modelling exchange rates
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Uses Software

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