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Journal of Financial Econometrics Advance Access originally published online on August 9, 2006
Journal of Financial Econometrics 2006 4(4):594-616; doi:10.1093/jjfinec/nbl001
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© The Author 2006. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org.

A Mixture Multiplicative Error Model for Realized Volatility

Markku Lanne
     University of Jyväskylä, RUESG and HECER

Address correspondence to Markku Lanne, School of Business and Economics, P.O. Box 35, FIN-40014 University of Jyväskylä, Finland or e-mail: markku.lanne{at}econ.jyu.fi.

A multiplicative error model with time-varying parameters and an error term following a mixture of gamma distributions is introduced. The model is fitted to the daily realized volatility series of deutschemark/dollar and yen/dollar returns and is shown to capture the conditional distribution of these variables better than the commonly used autoregressive fractionally integrated moving average model. The forecasting performance of the new model is found to be, in general, superior to that of the set of volatility models recently considered by Andersen et al. (2003, Econometrica 71, 579–625) for the same data.

KEYWORDS: gamma distribution, mixture model, realized volatility

Received January 25, 2006; revised June 20, 2006; accepted July 4, 2006


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