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Stock index realized volatility forecasting in the presence of heterogeneous leverage effects and long range dependence in the volatility of realized volatility

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In this article, we account for the presence of heterogeneous leverage effects and the persistence in the volatility of stock index realized volatility. The Heterogeneous Autoregressive (HAR) Realized Volatility (RV) model is extended in order to account for asymmetric responses to negative and positive shocks occurring at distinct frequencies, as well as, for the long range dependence in the heteroscedastic variance of the residuals. Compared with established HAR and Autoregressive Fractionally Integrated Moving Average (ARFIMA) realized volatility models, the proposed model exhibits superior in sample fitting, as well as, out of sample volatility forecasting performance. The latter is further improved when the Realized Power Variation (RPV) is used as a regressor, while we show that our analysis is also robust against microstructure noise.
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Keywords: C13; C22; C51; C53; high frequency data; leverage effects; long memory; volatility forecasting

Document Type: Research Article

Affiliations: Financial Engineering Research Unit, Department of Management Science and Technology,Athens University of Economics and Business, 47A Evelpidon Str.Athens 11362, Greece

Publication date: 2012-09-01

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