Forecast Combinations in the Presence of Structural Breaks: Evidence from U.S. Equity Markets
Realized volatility, building on the theory of a simple continuous time process, has recently received attention as a nonparametric ex-post estimate of the return variation. This paper addresses the problem of parameter instability due to the presence of structural breaks in realized volatility in t...
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| Format: | Article |
| Language: | English |
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MDPI AG
2018-03-01
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| Series: | Mathematics |
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| Online Access: | http://www.mdpi.com/2227-7390/6/3/34 |
| _version_ | 1831775805520216064 |
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| author | Davide De Gaetano |
| author_facet | Davide De Gaetano |
| author_sort | Davide De Gaetano |
| collection | DOAJ |
| description | Realized volatility, building on the theory of a simple continuous time process, has recently received attention as a nonparametric ex-post estimate of the return variation. This paper addresses the problem of parameter instability due to the presence of structural breaks in realized volatility in the context of three HAR-type models. The analysis is conducted on four major U.S. equity indices. More specifically, a recursive testing methodology is performed to evaluate the null hypothesis of constant parameters, and then, the performance of several forecast combinations based on different weighting schemes is compared in an out-of-sample variance forecasting exercise. The main findings are the following: (i) the hypothesis of constant model parameters is rejected for all markets under consideration; (ii) in all cases, the recursive forecasting approach, which is appropriate in the absence of structural changes, is outperformed by forecast combination schemes; and (iii) weighting schemes that assign more weight in most recent observations are superior in the majority of cases. |
| first_indexed | 2024-12-22T09:21:02Z |
| format | Article |
| id | doaj.art-ea2ea5cee42742efa7ae0a6053307779 |
| institution | Directory Open Access Journal |
| issn | 2227-7390 |
| language | English |
| last_indexed | 2024-12-22T09:21:02Z |
| publishDate | 2018-03-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | Mathematics |
| spelling | doaj.art-ea2ea5cee42742efa7ae0a60533077792022-12-21T18:31:11ZengMDPI AGMathematics2227-73902018-03-01633410.3390/math6030034math6030034Forecast Combinations in the Presence of Structural Breaks: Evidence from U.S. Equity MarketsDavide De Gaetano0University of Roma Tre, Via Silvio D’Amico, 77–00145 Rome, ItalyRealized volatility, building on the theory of a simple continuous time process, has recently received attention as a nonparametric ex-post estimate of the return variation. This paper addresses the problem of parameter instability due to the presence of structural breaks in realized volatility in the context of three HAR-type models. The analysis is conducted on four major U.S. equity indices. More specifically, a recursive testing methodology is performed to evaluate the null hypothesis of constant parameters, and then, the performance of several forecast combinations based on different weighting schemes is compared in an out-of-sample variance forecasting exercise. The main findings are the following: (i) the hypothesis of constant model parameters is rejected for all markets under consideration; (ii) in all cases, the recursive forecasting approach, which is appropriate in the absence of structural changes, is outperformed by forecast combination schemes; and (iii) weighting schemes that assign more weight in most recent observations are superior in the majority of cases.http://www.mdpi.com/2227-7390/6/3/34realized volatilityforecast combinationsstructural breaks |
| spellingShingle | Davide De Gaetano Forecast Combinations in the Presence of Structural Breaks: Evidence from U.S. Equity Markets Mathematics realized volatility forecast combinations structural breaks |
| title | Forecast Combinations in the Presence of Structural Breaks: Evidence from U.S. Equity Markets |
| title_full | Forecast Combinations in the Presence of Structural Breaks: Evidence from U.S. Equity Markets |
| title_fullStr | Forecast Combinations in the Presence of Structural Breaks: Evidence from U.S. Equity Markets |
| title_full_unstemmed | Forecast Combinations in the Presence of Structural Breaks: Evidence from U.S. Equity Markets |
| title_short | Forecast Combinations in the Presence of Structural Breaks: Evidence from U.S. Equity Markets |
| title_sort | forecast combinations in the presence of structural breaks evidence from u s equity markets |
| topic | realized volatility forecast combinations structural breaks |
| url | http://www.mdpi.com/2227-7390/6/3/34 |
| work_keys_str_mv | AT davidedegaetano forecastcombinationsinthepresenceofstructuralbreaksevidencefromusequitymarkets |