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Mathematics 2018, 6(3), 34;

Forecast Combinations in the Presence of Structural Breaks: Evidence from U.S. Equity Markets

University of Roma Tre, Via Silvio D’Amico, 77–00145 Rome, Italy
SOSE—Soluzioni per il Sistema Economico S.p.A., Via Mentore Maggini, 48/C–00143 Rome, Italy
Received: 24 January 2018 / Revised: 13 February 2018 / Accepted: 20 February 2018 / Published: 1 March 2018
(This article belongs to the Special Issue Stochastic Processes with Applications)
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Realized volatility, building on the theory of a simple continuous time process, has recently received attention as a nonparametric ex-post estimate of the return variation. This paper addresses the problem of parameter instability due to the presence of structural breaks in realized volatility in the context of three HAR-type models. The analysis is conducted on four major U.S. equity indices. More specifically, a recursive testing methodology is performed to evaluate the null hypothesis of constant parameters, and then, the performance of several forecast combinations based on different weighting schemes is compared in an out-of-sample variance forecasting exercise. The main findings are the following: (i) the hypothesis of constant model parameters is rejected for all markets under consideration; (ii) in all cases, the recursive forecasting approach, which is appropriate in the absence of structural changes, is outperformed by forecast combination schemes; and (iii) weighting schemes that assign more weight in most recent observations are superior in the majority of cases. View Full-Text
Keywords: realized volatility; forecast combinations; structural breaks realized volatility; forecast combinations; structural breaks

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De Gaetano, D. Forecast Combinations in the Presence of Structural Breaks: Evidence from U.S. Equity Markets. Mathematics 2018, 6, 34.

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