The no-arbitrage relation between futures and spot prices implies an analogous relation between futures and spot daily ranges. The long memory features of the range-based volatility estimators are analyzed, and fractional cointegration is tested in a semiparametric framework. In particular, the no-arbitrage condition is used to derive a long run relationship between volatility measures and to justify the use of a fractional vector error correction model (FVECM) to study their dynamic relationship. The out-of-sample forecasting superiority of FVECM, with respect to alternative models, is documented. The results highlight the importance of incorporating the long-run equilibrium in volatilities to obtain better forecasts, given the information content in the volatility of futures prices.
A no-arbitrage fractional cointegration model for futures and spot daily ranges
ROSSI, EDUARDO;SANTUCCI DE MAGISTRIS, PAOLO
2012-01-01
Abstract
The no-arbitrage relation between futures and spot prices implies an analogous relation between futures and spot daily ranges. The long memory features of the range-based volatility estimators are analyzed, and fractional cointegration is tested in a semiparametric framework. In particular, the no-arbitrage condition is used to derive a long run relationship between volatility measures and to justify the use of a fractional vector error correction model (FVECM) to study their dynamic relationship. The out-of-sample forecasting superiority of FVECM, with respect to alternative models, is documented. The results highlight the importance of incorporating the long-run equilibrium in volatilities to obtain better forecasts, given the information content in the volatility of futures prices.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
