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 |
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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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