## Dynamics of Realized Volatility and Correlations: An Empirical Study Using Interest Rate Spread Options (2001)

Citations: | 1 - 0 self |

### BibTeX

@MISC{Ferl01dynamicsof,

author = {René Ferl and Simon Lalancette},

title = {Dynamics of Realized Volatility and Correlations: An Empirical Study Using Interest Rate Spread Options},

year = {2001}

}

### OpenURL

### Abstract

by Hydro-Québec. 3 We have benefited from the useful commentsof Jean-Hugues Lafleur. All remaining errors are our responsibility. This study empirically examines the competitiveness of different forecasting sets of realized volatilities and correlations using linear and nonlinear specifications of time series based on high frequency data. The linear specification uses lagged explanatory variables to explain fractionally integrated series of realized volatilities and correlations. The nonlinear specification consists of a two-step approach. In the first step, joint time series of realized volatilities and correlations are filtered using a multivariate singular system analysis approach. Based on the cleaned series, vectors of nearest neighbors are identified in space and casted into a local linear regression to generate forecasts in the second step. The empirical performance of those specifications is compared to a GARCH diagonal-BEKK model in the context of a trader who would simultaneously quote a call spread option price based on the forecasted parameters and delta-hedge her position with a replicating portfolio. More traditional loss functions based on the absolute forecasting error are also used. The forecasting methodologies based on time series of realized volatilities and correlations generally (but not unanimously) dominate the GARCH approach. Evidence of nonlinearity seems apparent for time series of volatilities irrespective of the return sampling frequency. General performance ranking for the approaches based on realized volatilities and correlations is not robust to the chosen loss function and the return sampling frequency.