External Shocks and the Heterogeneous Autoregressive Model of Realized Volatility
We examine the information effect of external shocks on the realized volatility based on the HAR-RV (heterogeneous autoregressive realized volatility) model in Korean stock market. For the study, we estimate the realized volatility using the five minute intraday high-frequency KOSPI return data from Jan. 2004 to June 2016. And we develop and use the single external shock variable (ES) which is constructed from the 10-external shock variables representing changes of international stock, crude oil, gold, foreign exchange market prices, and interest rate. We use factor analysis to develop the ES from the 10-external shock variables. The main results are as follows. First, the developed external shock variable (ES) represents well the shocks in international market prices and the time-series patterns of ES are similar to the realized volatility patterns of KOSPI, especially in the market crash period. Second, in In-sample analysis using the HAR-RV-ES model which is the model added the ES variable to HAR-RV model as a new explanatory variable, the ES variable shows a significant explanatory power on changes of daily and weekly realized volatility. Third, in Out-of-sample analysis, the ES variable has a significant predictive power on future realized volatility. Fourth, The information effects of ES variable are robust to volatility leverage effect. These results suggest that the developed ES variable in this study is useful variable with additive and independent information effect for explaining and predicting the future volatility in the HAR-RV model, and the proposed method for developing the ES variable is helpful for the improvement of HAR-RV model.
External shock variable,Realized Volatility,Heterogenous autoregressive model,Factor analysis,In-sample and Out-of-sample