Modeling and forecasting exchange rate volatility in time-frequency domain

0456184 - ÚTIA 2017 RIV NL eng J - Journal Article
Baruník, Jozef - Křehlík, Tomáš - Vácha, Lukáš
Modeling and forecasting exchange rate volatility in time-frequency domain.
European Journal of Operational Research. Roč. 251, č. 1 (2016), s. 329-340. ISSN 0377-2217. E-ISSN 1872-6860
R&D Projects: GA ČR GA13-32263S
EU Projects: European Commission 612955 - FINMAP
Institutional support: RVO:67985556
Keywords : Realized GARCH * Wavelet decomposition * Jumps * Multi-period-ahead volatility forecasting
Subject RIV: AH - Economics
Impact factor: 3.297, year: 2016
http://library.utia.cas.cz/separaty/2016/E/barunik-0456184.pdf

This paper proposes an enhanced approach to modeling and forecasting volatility using high frequency data. Using a forecasting model based on Realized GARCH with multiple time-frequency decomposed realized volatility measures, we study the influence of different timescales on volatility forecasts. The decomposition of volatility into several timescales approximates the behaviour of traders at corresponding investment horizons. The proposed methodology is moreover able to account for impact of jumps due to a recently proposed jump wavelet two scale realized volatility estimator. We propose a realized Jump-GARCH models estimated in two versions using maximum likelihood as well as observation-driven estimation framework of general- ized autoregressive score. We compare forecasts using several popular realized volatility measures on foreign exchange rate futures data covering the recent financial crisis.
Permanent Link: http://hdl.handle.net/11104/0260444