Intraday volatility forecast in Australian equity market

Abhay K. Singh, David E. Allen, Robert J. Powell

Research output: Chapter in Book/Report/Conference proceedingConference proceeding contributionpeer-review

1 Citation (Scopus)

Abstract

On the afternoon of May 6, 2010 Dow Jones Industrial Average (DJIA) plunged about 1000 points (about 9%) in a matter of minutes before rebounding almost as quickly. This was the biggest one day point decline on an intraday basis in the DJIA's history. An almost similar dramatic change in intraday volatility was observed on April 4, 2000 when DJIA dropped by 4.8%. These historical events present very compelling argument for the need of robust econometrics models which can forecast intraday asset volatility. There are numerous models available in the finance literature to model financial asset volatility. Various Autoregressive Conditional Heteroskedastic (ARCH) time series models are widely used for modelling daily (end of day) volatility of the financial assets. The family of basic GARCH models work well for modelling daily volatility but they are proven to be not as efficient for intraday volatility. The last two decades has seen some research augmenting the GARCH family of models to forecast intraday volatility, the Multiplicative Component GARCH (MCGARCH) model of Engle & Sokalska (2012) is the most recent of them. MCGARCH models the conditional variance as the multiplicative product of daily, diurnal, and stochastic intraday volatility of the financial asset. In this paper we use MCGARCH model to forecast intraday volatility of Australia's S&P/ASX-50 stock market, we also use the model to forecast the intraday Value at Risk. As the model requires a daily volatility component, we test a GARCH based estimate and a Realized Variance based estimate of daily volatility component.

Original languageEnglish
Title of host publicationProceedings - 20th International Congress on Modelling and Simulation, MODSIM 2013
EditorsJulia Piantadosi, Robert Anderssen, John Boland
Place of PublicationCanberra, ACT
PublisherModelling and Simulation Society of Australia and New Zealand Inc. (MSSANZ)
Pages1312-1318
Number of pages7
ISBN (Electronic)9780987214331
Publication statusPublished - 1 Jan 2013
Externally publishedYes
Event20th International Congress on Modelling and Simulation - Adapting to Change: The Multiple Roles of Modelling, MODSIM 2013 - Held jointly with the 22nd National Conference of the Australian Society for Operations Research, ASOR 2013 and the DSTO led Defence Operations Research Symposium, DORS 2013 - Adelaide, Australia
Duration: 1 Dec 20136 Dec 2013

Publication series

NameProceedings - 20th International Congress on Modelling and Simulation, MODSIM 2013

Conference

Conference20th International Congress on Modelling and Simulation - Adapting to Change: The Multiple Roles of Modelling, MODSIM 2013 - Held jointly with the 22nd National Conference of the Australian Society for Operations Research, ASOR 2013 and the DSTO led Defence Operations Research Symposium, DORS 2013
CountryAustralia
CityAdelaide
Period1/12/136/12/13

Keywords

  • ARCH
  • Intraday returns
  • Realized variance
  • Value at risk
  • Volatility

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