ABSTRACT
This paper extends the realized EGARCH-MIDAS (REGARCH-MIDAS) model to incorporate implied volatility (IV) derived from option prices. The extension allows us to examine the incremental information content of IV for forecasting volatility. An empirical investigation with S&P 500 index shows that IV contains valuable information for forecasting volatility. Our proposed model provides more accurate out-of-sample volatility forecasts compared to the EGARCH, the REGARCH and the REGARCH-MIDAS models as well as the EGARCH-IV and the REGARCH-IV models.
Acknowledgments
We would like to thank the Editor and an anonymous referee for the insightful comments and suggestions that greatly improved the paper.
Disclosure statement
No potential conflict of interest was reported by the authors.
Notes
1 Following Hansen and Huang (Citation2016), we assume that and to facilitate model estimation.