Flexible HAR Model for Realized Volatility
Type
working paper
Date Issued
2016-04-01
Author(s)
Abstract
The Heterogeneous Autoregressive (HAR) model is commonly used in modeling the dynamics of realized volatility. In this paper, we propose a flexible HAR(1,...,p) specification, employing the adaptive LASSO and its statistical inference theory to see whether the lag structure (1, 5, 22) implied from an economic point of view can be recovered by statistical methods.
Adaptive LASSO estimation and the subsequent hypothisis testing results show that there is no strong evidence that such a fixed lag structure can be exactly recovered by a flexible model. In terms of the out-of-sample forecasting, the proposed model slightly outperforms the classic specification and a superior predictive ability test shows that it cannot be significantly outperformed by any of the alternatives. We also apply the group LASSO and some related tests to check the validity of the classic HAR, which is rejected in most cases. The main reason for rejection might be the arrangement of groups, and a minor reason is the equality constraints on AR coefficients. This justifies our intention to use a flexible lag structure while still keeping the HAR frame. Finally, the time-varying behaviors show that when the market environment is not stable, the structure of (1, 5, 22) does not hold very well.
Adaptive LASSO estimation and the subsequent hypothisis testing results show that there is no strong evidence that such a fixed lag structure can be exactly recovered by a flexible model. In terms of the out-of-sample forecasting, the proposed model slightly outperforms the classic specification and a superior predictive ability test shows that it cannot be significantly outperformed by any of the alternatives. We also apply the group LASSO and some related tests to check the validity of the classic HAR, which is rejected in most cases. The main reason for rejection might be the arrangement of groups, and a minor reason is the equality constraints on AR coefficients. This justifies our intention to use a flexible lag structure while still keeping the HAR frame. Finally, the time-varying behaviors show that when the market environment is not stable, the structure of (1, 5, 22) does not hold very well.
Language
English
HSG Classification
contribution to scientific community
HSG Profile Area
SEPS - Quantitative Economic Methods
Publisher
University of St. Gallen
Publisher place
St. Gallen
Eprints ID
248495
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Aud_Hua_Okh_Flexible HAR Model for Realized Volatility.pdf
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