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Forecasting the volatility of the Australian Dollar using high frequency data: Does estimator accuracy improve forecast evaluation?

Abstract

We compare forecasts of the volatility of the Australian Dollar exchange rate to alternative measures of ex-post volatility. We develop and apply a simple test for the improvement in the ability of loss functions to distinguish between forecasts when the quality of a volatility estimator is increased. We find that both realized variance and the daily high-low range provide a significant improvement in loss function convergence relative to squared returns. We find that a model of stochastic volatility provides the best forecasts for models that use daily data, and the GARCH(1,1) model provides the best forecast using high-frequency data.

Acceptance Date Dec 30, 2018
Publication Date Jul 1, 2019
Journal International Journal of Finance and Economics
Print ISSN 1076-9307
Publisher Wiley
Pages 1355-1389
DOI https://doi.org/10.1002/ijfe.1723
Keywords Volatility forecasting, exchange rate, Australian Dollar, stochastic volatility, realized variance, high-low range
Publisher URL https://doi.org/10.1002/ijfe.1723

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