Forecasting Trading-Session Return Volatility in Taiwan Futures Market: A Periodic Regime Switching with Jump Approach

This study develops a novel periodic regime-switching model (the PRS model) to improve the forecasting of stock market volatility by accounting for the information from non-trading and trading periods, including regular trading and after-hour trading. Empirical analysis of the Taiwan Futures Exchang...

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Bibliographic Details
Published in:Asia-Pacific financial markets 2024-06, Vol.31 (2), p.285-305
Main Authors: Lai, Yi-Hao, Wang, Yi-Chiuan, Chang, Yu-Ching
Format: Article
Language:English
Subjects:
Econometrics
Economic Theory/Quantitative Economics/Mathematical Methods
Economics and Finance
Empirical analysis
Finance
Forecasting
Futures market
Information flow
Innovations
International Economics
Macroeconomics/Monetary Economics//Financial Economics
Original Research
Prices
Risk management
Securities markets
Stock exchanges
Switching
Volatility
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Summary:This study develops a novel periodic regime-switching model (the PRS model) to improve the forecasting of stock market volatility by accounting for the information from non-trading and trading periods, including regular trading and after-hour trading. Empirical analysis of the Taiwan Futures Exchange (TAIFEX) demonstrates the significant improvements of the PRS model in both in-sample and out-of-sample periods. Our results also show that the introduction of after-hour trading sessions has provided valuable information for volatility forecasting in subsequent regular trading sessions, emphasizing the importance of considering diverse information flows across different trading and non-trading times. The PRS model effectively captures the dynamics of non-trading and trading sessions and the influence of unusual news arrivals and jumps on market volatility, contributing to investment and risk management strategies.
ISSN:1387-2834
1573-6946
DOI:10.1007/s10690-023-09415-w