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International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page High Frequency Data, Frequency Domain Inference and Volatility Forecasting
Jonathan H. Wright and Tim Bollerslev
1999-649  (October 1999)

Abstract:  While it is clear that the volatility of asset returns is serially correlated, there is no general agreement as to the most appropriate parametric model for characterizing this temporal dependence. In this paper, we propose a simple way of modeling financial market volatility using high frequency data. The method avoids using a tight parametric model, by instead simply fitting a long autoregression to log-squared, squared or absolute high frequency returns. This can either be estimated by the usual time domain method, or alternatively the autoregressive coefficients can be backed out from the smoothed periodogram estimate of the spectrum of log-squared, squared or absolute returns. We show how this approach can be used to construct volatility forecasts, which compare favorably with some leading alternatives in an out-of-sample forecasting exercise.

Full paper (3726 KB PDF)

Autoregression, Spectrum, Volatility Forecasting, Wiener-Kolmogorov Filter, High Frequency Data, Exchange Rates

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