Forecasting variance using stochastic volatility and GARCH |
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Authors: | Björn Hansson ? Peter Hördahl |
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Institution: | 1. Department of Economics , Lund University , Lund, Sweden;2. European Central Bank , Frankfurt, Germany |
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Abstract: | This paper estimates the conditional variance of daily Swedish OMX-index returns with stochastic volatility (SV) models and GARCH models and evaluates the in-sample performance as well as the out-of-sample forecasting ability of the models. Asymmetric as well as weekend/holiday effects are allowed for in the variance, and the assumption that errors are Gaussian is released. Evidence is found of a leverage effect and of higher variance during weekends. In both in-sample and out-of-sample comparisons SV models outperform GARCH models. However, while asymmetry, weekend/holiday effects and non-Gaussian errors are important for the in-sample fit, it is found that these factors do not contribute to enhancing the forecasting ability of the SV models. |
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Keywords: | Variance stochastic volatility GARCH models forecasting ability weekend/holiday effects |
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