Intraday forecasts of a volatility index: functional time series methods with dynamic updating

As a forward-looking measure of future equity market volatility, the VIX index has gained immense popularity in recent years to become a key measure of risk for market analysts and academics. We consider discrete reported intraday VIX tick values as realisations of a collection of curves observed se...

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Bibliographic Details
Published in:Annals of operations research 2019-11, Vol.282 (1-2), p.331-354
Main Authors: Shang, Han Lin, Yang, Yang, Kearney, Fearghal
Format: Article
Language:English
Subjects:
Business and Management
Combinatorics
Data analysis
Economic forecasting
Equity (Finance)
Forecasts and trends
Markets
Methods
Model accuracy
Operations research
Operations Research/Decision Theory
S.I.: Application of O. R. to Financial Markets
Stock market indexes
Theory of Computation
Time series
Volatility
Volatility (Finance)
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Summary:As a forward-looking measure of future equity market volatility, the VIX index has gained immense popularity in recent years to become a key measure of risk for market analysts and academics. We consider discrete reported intraday VIX tick values as realisations of a collection of curves observed sequentially on equally spaced and dense grids over time and utilise functional data analysis techniques to produce 1-day-ahead forecasts of these curves. The proposed method facilitates the investigation of dynamic changes in the index over very short time intervals as showcased using the 15-s high-frequency VIX index values. With the help of dynamic updating techniques, our point and interval forecasts are shown to enjoy improved accuracy over conventional time series models.
ISSN:0254-5330
1572-9338
DOI:10.1007/s10479-018-3108-4