Predictability of VRP: Hongkong Evidence
Volatility modeling is one of the central issues for theoretical studies and practical applications. In the literature, the conditional volatility model family, i.e. GARCH type model proposed by Engle (1982) (Econometrica 50(4), 987–1007, 1982) and Bollerslev (1986) (J Econom 31, 307–327, 1986) is used to model the fat-tail and the volatility clustering of stock return. On the other hand, the stochastic volatility model (Heston in Rev Financ Stud 6, 327–343, 1993, Heston 1993 and Shephard and Andersen in Stochastic volatility: Origins and overview, 233–254, 2009, Shephard and Andersen 2009) provides an alternative approach to model the time-varying behavior of volatility as a latent state variable. Despite the success of previous models, their predictions of volatility crucially rely on the specification of models used. Therefore, once there exists model misspecification error, the estimates would become inconsistent. Partially inspired by above issues, the model-free volatility approach, including realized volatility and model-free implied volatility, attracts a lot of research attention.