Are combination forecasts of S&P 500 volatility statistically superior?



reflecting strong volatility persistence, and are qualitatively similar to those
reported in BPT (2001)5. Furthermore, allowing for asymmetries in conditional
volatility is important, irrespective of the volatility process considered.

While not considered by BPT 2001, this study also proposes that an SV

model may be used to generate forecasts. SV models differ from GARCH models
in that conditional volatility is treated as an unobserved variable, and not as
a deterministic function of lagged returns. The simplest SV model describes
returns as

rt = μ + σt ut    ut ~ N (0,1)                      (3)

where σt is the time t conditional standard deviation of rt. SV models treats
σt as an unobserved (latent) variable, following its own stochastic path, the
simplest being an AR(1) process,

!°g(σ?) = a + βlog(σ^-1)+ wt    Wt ~ N(0).          (4)

Similar to Koopman et al. (2004), this study extends a standard volatility

model to incorporate RV as an exogenous variable in the volatility equation.

The standard SV process in equation (4) can be extended to incorporate RV in

the following manner and is denoted by SVRV

∣°g(σC = α + β log (^"t+ 70M≡t-J - ¾-i[log^LJD + wt∙    (5)

Here, RV enters the volatility equation through the term log(BFt-1) T,t-i

[log (σ^-ι)]. This form is chosen due to the high degree of correlation between

5As the models discussed in this section will be used to generate 2,460 recursive volatility
forecasts (see Section 3) reporting parameter estimates is of little value. Here we will merely
discuss the estimated model properties qualitatively. Parameter estimates for the recursive
windows and the full sample are available on request.



More intriguing information

1. Feeling Good about Giving: The Benefits (and Costs) of Self-Interested Charitable Behavior
2. he Effect of Phosphorylation on the Electron Capture Dissociation of Peptide Ions
3. Explaining Growth in Dutch Agriculture: Prices, Public R&D, and Technological Change
4. The name is absent
5. Why unwinding preferences is not the same as liberalisation: the case of sugar
6. Name Strategy: Its Existence and Implications
7. Stillbirth in a Tertiary Care Referral Hospital in North Bengal - A Review of Causes, Risk Factors and Prevention Strategies
8. Spousal Labor Market Effects from Government Health Insurance: Evidence from a Veterans Affairs Expansion
9. Endogenous Determination of FDI Growth and Economic Growth:The OECD Case
10. IMMIGRATION POLICY AND THE AGRICULTURAL LABOR MARKET: THE EFFECT ON JOB DURATION