The Contribution of Jump Signs and Activity to Forecasting Stock Price Volatility

52 Pages Posted: 22 Apr 2019 Last revised: 30 Dec 2022

See all articles by Rodrigo Hizmeri

Rodrigo Hizmeri

University of Liverpool - Management School (ULMS)

Marwan Izzeldin

Lancaster University Management School

Anthony Murphy

Federal Reserve Banks - Federal Reserve Bank of Dallas

Mike G. Tsionas

Lancaster University

Multiple version iconThere are 2 versions of this paper

Date Written: March, 2019

Abstract

We propose a novel approach to decompose realized jump measures by type of activity (finite/infinite) and sign, and also provide noise-robust versions of the ABD jump test (Andersen et al., 2007b) and realized semivariance measures. We find that infinite (finite) jumps improve the forecasts at shorter (longer) horizons; but the contribution of signed jumps is limited. As expected, noise-robust measures deliver substantial forecast improvements at higher sampling frequencies, although standard volatility measures at the 300-second frequency generate the smallest MSPEs. Since no single model dominates across sampling frequency and forecasting horizon, we show that model averaged volatility forecasts—using time-varying weights and models from the model confidence set—generally outperform forecasts from both the benchmark and single best extended HAR model. Finally, forecasts using volatility and jump measures based on transaction sampling are inferior to the forecasts from clock-based sampling.

Keywords: Volatility Forecasts, Realized Volatility, Finite Activity Jumps, Infinite Activity Jumps, Signed Jumps, Noise-Robust Realized Volatility, Model Averaging

JEL Classification: C22, C51, C53, C58

Suggested Citation

Hizmeri, Rodrigo and Izzeldin, Marwan and Murphy, Anthony and Tsionas, Mike G., The Contribution of Jump Signs and Activity to Forecasting Stock Price Volatility (March, 2019). FRB of Dallas Working Paper No. 1902, Available at SSRN: https://ssrn.com/abstract=3375186 or http://dx.doi.org/10.24149/wp1902r2

Rodrigo Hizmeri (Contact Author)

University of Liverpool - Management School (ULMS) ( email )

Chatham St.
Liverpool, L69 7ZH
United Kingdom

HOME PAGE: http://www.rodrigohizmeri.com

Marwan Izzeldin

Lancaster University Management School ( email )

Lancaster, LA1 4YX
United Kingdom
01524 594674 (Phone)

HOME PAGE: http://www.lums.lancs.ac.uk/profiles/marwan-izzeldin/

Anthony Murphy

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

Mike G. Tsionas

Lancaster University

Lancaster LA1 4YX
United Kingdom

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