Analytical evaluation of volatility forecasts

Torben G. Andersen*, Tim Bollerslev, Nour Meddahi

*Corresponding author for this work

Research output: Contribution to journalReview articlepeer-review

93 Scopus citations

Abstract

Estimation and forecasting for realistic continuous-time stochastic volatility models is hampered by the lack of closed-form expressions for the likelihood. In response, Andersen, Bollerslev, Diebold, and Labys (Econometrica, 71 (2003), 579-625) advocate forecasting integrated volatility via reduced-form models for the realized volatility, constructed by summing high-frequency squared returns. Building on the eigenfunction stochastic volatility models, we present analytical expressions for the forecast efficiency associated with this reduced-form approach as a function of sampling frequency. For popular models like GARCH, multi-factor affine, and lognormal diffusions, the reduced form procedures perform remarkably well relative to the optimal (infeasible) forecasts.

Original languageEnglish (US)
Pages (from-to)1079-1110
Number of pages32
JournalInternational Economic Review
Volume45
Issue number4
DOIs
StatePublished - Nov 1 2004

ASJC Scopus subject areas

  • Economics and Econometrics

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