Time‐Varying Parameter Realized Volatility Models

In this paper, we introduce the functional coefficient to heterogeneous autoregressive realized volatility (HAR-RV) models to make the parameters change over time. A nonparametric statistic is developed to perform a specification test. The simulation results show that our test displays reliable size and good power. Using the proposed test, we find a significant time variation property of coefficients to the HAR-RV models. Time-varying parameter (TVP) models can significantly outperform their constant-coefficient counterparts for longer forecasting horizons. The predictive ability of TVP models can be improved by accounting for VIX information. Copyright © 2016 John Wiley & Sons, Ltd.

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