Dynamics of financial returns densities: A functional approach applied to the Bovespa intraday index |
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Authors: | Eduardo Horta Flavio Ziegelmann |
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Institution: | Universidade Federal do Rio Grande do Sul, Department of Statistics, 9500 Bento Gona?lves Av., 43–111, Porto Alegre, RS, 91509-900, Brazil |
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Abstract: | We model the stochastic evolution of the probability density functions (PDFs) of Ibovespa intraday returns over business days, in a functional time series framework. We find evidence that the dynamic structure of the PDFs reduces to a vector process lying in a two-dimensional space. Our main contributions are as follows. First, we provide further insights into the finite-dimensional decomposition of the curve process: it is shown that its evolution can be interpreted as a dynamic dispersion-symmetry shift. Second, we provide an application to realized volatility forecasting, with a forecasting ability that is comparable to those of HAR realized volatility models in the model confidence set framework. |
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Keywords: | Stochastic processes Autocovariance Dimension reduction High frequency data Volatility forecasting |
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