Modeling and forecasting the additive bias corrected extreme value volatility estimator |
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Institution: | 1. Institute for Financial Management Research, 24, Kothari Road, Nungambakkam, Chennai 600034, India;2. Centre for Advanced Financial Studies, Institute for Financial Management and Research, 24, Kothari Road, Nungambakkam, Chennai 600034, India |
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Abstract: | In this paper, we provide a framework to model and forecast daily volatility based on the newly proposed additive bias corrected extreme value volatility estimator (the Add RS estimator). The theoretical framework of the additive bias corrected extreme value volatility estimator is based on the closed form solution for the joint probability of the running maximum and the terminal value of the random walk. Using the opening, high, low and closing prices of S&P 500, CAC 40, IBOVESPA and S&P CNX Nifty indices, we find that the logarithm of the Add RS estimator is approximately Gaussian and that a simple linear Gaussian long memory model can be applied to forecast the logarithm of the Add RS estimator. The forecast evaluation analysis indicates that the conditional Add RS estimator provides better forecasts of realized volatility than alternative range-based and return-based models. |
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