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The Impact of Jumps and Leverage in Forecasting Co-Volatility

Author

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  • Asai, M.
  • McAleer, M.J.
Abstract
__Abstract__ The paper investigates the impact of jumps in forecasting co-volatility, accommodating leverage effects. We modify the jump-robust two time scale covariance estimator of Boudt and Zhang (2013) such that the estimated matrix is positive definite. Using this approach we can disentangle the estimates of the integrated co-volatility matrix and jump variations from the quadratic covariation matrix. Empirical results for three stocks traded on the New York Stock Exchange indicate that the co-jumps of two assets have a significant impact on future co-volatility, but that the impact is negligible for forecasting weekly and monthly horizons.

Suggested Citation

  • Asai, M. & McAleer, M.J., 2015. "The Impact of Jumps and Leverage in Forecasting Co-Volatility," Econometric Institute Research Papers EI 2015-06, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    • Handle: RePEc:ems:eureir:78068
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    References listed on IDEAS

    as
    1. repec:hal:journl:peer-00815564 is not listed on IDEAS
    2. Corsi, Fulvio & Pirino, Davide & Renò, Roberto, 2010. "Threshold bipower variation and the impact of jumps on volatility forecasting," Journal of Econometrics, Elsevier, vol. 159(2), pages 276-288, December.
    3. Pan, Jun, 2002. "The jump-risk premia implicit in options: evidence from an integrated time-series study," Journal of Financial Economics, Elsevier, vol. 63(1), pages 3-50, January.
    4. Nikolaus Hautsch & Lada M. Kyj & Roel C. A. Oomen, 2012. "A blocking and regularization approach to high‐dimensional realized covariance estimation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 27(4), pages 625-645, June.
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    10. Asai, Manabu & McAleer, Michael, 2015. "Forecasting co-volatilities via factor models with asymmetry and long memory in realized covariance," Journal of Econometrics, Elsevier, vol. 189(2), pages 251-262.
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    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Asai, Manabu & Gupta, Rangan & McAleer, Michael, 2020. "Forecasting volatility and co-volatility of crude oil and gold futures: Effects of leverage, jumps, spillovers, and geopolitical risks," International Journal of Forecasting, Elsevier, vol. 36(3), pages 933-948.
    2. Manabu Asai & Rangan Gupta & Michael McAleer, 2019. "The Impact of Jumps and Leverage in Forecasting the Co-Volatility of Oil and Gold Futures," Energies, MDPI, vol. 12(17), pages 1-17, September.
    3. Christophe Chorro & Florian Ielpo & Benoît Sévi, 2020. "The contribution of intraday jumps to forecasting the density of returns," Post-Print halshs-02505861, HAL.
    4. Rangan Gupta & Christian Pierdzioch, 2024. "Multi-Task Forecasting of the Realized Volatilities of Agricultural Commodity Prices," Mathematics, MDPI, vol. 12(18), pages 1-26, September.
    5. Asai, Manabu & Chang, Chia-Lin & McAleer, Michael, 2017. "Realized stochastic volatility with general asymmetry and long memory," Journal of Econometrics, Elsevier, vol. 199(2), pages 202-212.
    6. Chorro, Christophe & Ielpo, Florian & Sévi, Benoît, 2020. "The contribution of intraday jumps to forecasting the density of returns," Journal of Economic Dynamics and Control, Elsevier, vol. 113(C).
    7. Yaojie Zhang & Yu Wei & Li Liu, 2019. "Improving forecasting performance of realized covariance with extensions of HAR-RCOV model: statistical significance and economic value," Quantitative Finance, Taylor & Francis Journals, vol. 19(9), pages 1425-1438, September.
    8. Luo, Jiawen & Demirer, Riza & Gupta, Rangan & Ji, Qiang, 2022. "Forecasting oil and gold volatilities with sentiment indicators under structural breaks," Energy Economics, Elsevier, vol. 105(C).
    9. Manabu Asai & Michael McAleer, 2022. "Bayesian Analysis of Realized Matrix-Exponential GARCH Models," Computational Economics, Springer;Society for Computational Economics, vol. 59(1), pages 103-123, January.
    10. Asai, Manabu & Chang, Chia-Lin & McAleer, Michael, 2022. "Realized matrix-exponential stochastic volatility with asymmetry, long memory and higher-moment spillovers," Journal of Econometrics, Elsevier, vol. 227(1), pages 285-304.
    11. Christophe Chorro & Florian Ielpo & Benoît Sévi, 2020. "The contribution of intraday jumps to forecasting the density of returns," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-02505861, HAL.
    12. Qu, Hui & Zhang, Yi, 2022. "Asymmetric multivariate HAR models for realized covariance matrix: A study based on volatility timing strategies," Economic Modelling, Elsevier, vol. 106(C).

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    More about this item

    Keywords

    Co-Volatility; Forecasting; Jump; Leverage Effects; Realized Covariance; Threshold; Estimation.;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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