Document Type

Conference Proceeding

Publisher

The Modelling and Simulation Society of Australia and New Zealand Inc.

Faculty

Faculty of Business and Law

School

School of Business/Marketing and Services Research Centre

RAS ID

17028

Comments

This article was originally published by the Modelling and Simulation Society of Australia and New Zealand Inc as: Singh, A. , Allen, D. E., & Powell, R. (2013). Intraday volatility forecast in Australian equity market. In MODSIM2013, 20th International Congress on Modelling and Simulation (pp. 1312-1318). Canberra, Australia. The Modelling and Simulation Society of Australia and New Zealand Inc. Original article available online here

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.

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