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Decisions in Economics and Finance

, Volume 42, Issue 2, pp 449–469 | Cite as

Estimating stochastic volatility: the rough side to equity returns

  • Jonathan HaynesEmail author
  • Daniel Schmitt
  • Lukas Grimm
Article

Abstract

This paper evaluates the forecasting performance of a Brownian semi-stationary (BSS) process in modelling the volatility of 21 equity indices. We implement a hybrid scheme to simulate BSS processes with high efficiency and precision. These simulations are useful to price derivatives, accounting for rough volatility. We then calibrate the BSS parameters for the realised kernel of 21 equity indices, using data from the Oxford-Man Institute. Finally, we conduct one-step and ten-step ahead forecasts on six indices and find that the BSS outperforms benchmarks, including a Log-HAR specification, in most cases.

Keywords

Asset pricing Stochastic processes Forecasting Volatility Derivatives 

JEL Classification

C22 C51 C53 C58 G17 

Notes

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Copyright information

© Associazione per la Matematica Applicata alle Scienze Economiche e Sociali (AMASES) 2019

Authors and Affiliations

  1. 1.Barcelona Graduate School of EconomicsBarcelonaSpain
  2. 2.Oxera Consulting LLPOxfordUK

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