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Korean Journal of Financial Studies 2011;40(1):171-194.
Published online February 28, 2011.
An Empirical Study on the Volatility Forecasts with Regime-Switching GARCH Model in the Korean Stock Market
Sung Won Hwang, Hyeuk Sun Ryu
국면전환 GARCH 모형을 이용한 변동성 구조 분석 및 예측에 관한 실증 연구
황성원, 류혁선
Abstract
With the growth of financial derivatives market, forecasting future volatility becomes an increasingly important tool for evaluating derivatives. Simple Moving Average (SMA) method has been popularized in business practice as a convenient method for forecasting volatility. However, it fails to take into account the mean-reversion and heteroskedasticity of volatility structure. GARCH models can explain those phenomena, but they are insufficient for explaining structural changes in variance process. This paper introduces Regime Switching GARCH (RS-GARCH) that can explain the above phenomena and thereby investigates Korean Stock Market volatility structure model. The paper also compares SMA, GARCH, and RS-GARCH model for their respective performance in forecasting volatility, and explains why the RS-GARCH model is more effective than the two alternative models in forecasting short-term volatility.
Key Words: 국면전환 GARCH,단순평균법,변동성 구조,변동성 예측,GARCH,Regime-Switching GARCH,SMA,Volatility Forecasting,Volatility Structure


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