TY - UNPB

T1 - The Role of Implied Volatility in Forecasting Future Realized Volatility and Jumps in Foreign Exchange, Stock and Bond Markets

AU - Christensen, Bent Jesper

PY - 2007

Y1 - 2007

N2 - We study the forecasting of future realized volatility in the stock, bond, and foreign exchange markets, as well as the continuous sample path and jump components of this, from variables in the information set, including implied volatility backed out from option prices. Recent nonparametric statistical techniques are used to separate realized volatility into its continuous and jump components, thus enhancing forecasting performance as shown by Andersen et al. (2005). We generalize the heterogeneous autoregressive (HAR) model to include implied volatility as an additional regressor, and to the separate forecasting of the realized components. We also introduce a new vector HAR (VecHAR) model for the resulting simultaneous system, controlling for possible endogeneity issues in the forecasting equations. We show that implied volatility contains incremental information about future volatility relative to both continuous and jump components of past realized volatility. Perhaps surprisingly, the jump component of realized return volatility is, to some extent, predictable, and options appear to be calibrated to incorporate information about future jumps.

AB - We study the forecasting of future realized volatility in the stock, bond, and foreign exchange markets, as well as the continuous sample path and jump components of this, from variables in the information set, including implied volatility backed out from option prices. Recent nonparametric statistical techniques are used to separate realized volatility into its continuous and jump components, thus enhancing forecasting performance as shown by Andersen et al. (2005). We generalize the heterogeneous autoregressive (HAR) model to include implied volatility as an additional regressor, and to the separate forecasting of the realized components. We also introduce a new vector HAR (VecHAR) model for the resulting simultaneous system, controlling for possible endogeneity issues in the forecasting equations. We show that implied volatility contains incremental information about future volatility relative to both continuous and jump components of past realized volatility. Perhaps surprisingly, the jump component of realized return volatility is, to some extent, predictable, and options appear to be calibrated to incorporate information about future jumps.

M3 - Working paper

BT - The Role of Implied Volatility in Forecasting Future Realized Volatility and Jumps in Foreign Exchange, Stock and Bond Markets

PB - University of Aarhus

ER -