Volatility Forecasting Performance of Smooth Transition Exponential Smoothing Method: Evidence from Mutual Fund Indices in Malaysia

Asian Economic and Financial Review

article

Wan Cheong Kin¹  Choo Wei Chong²  Annuar Md Nassir³  Muzafar Shah Habibullah⁴  Zulkornain Yusop⁴ 

[1] School of Graduate Studies, Universiti Putra Malaysia, Serdang, Malaysia, Department of Business Studies, HELP University;School of Business and Economics, Universiti Putra Malaysia;School of Economics and Management, Xiamen University Malaysia;Putra Business School, Universiti Putra Malaysia

关键词: Smooth transition exponential;    Smoothing;    GARCH;    Volatility forecasting;    Mutual funds;    Model confidence set;    Outliers.;   

DOI  :  10.18488/journal.aefr.2021.1110.829.859

学科分类：社会科学、人文和艺术（综合）

来源: Asian Economic and Social Society

【 摘 要 】

This paper aims to empirically compare the performance of the smooth transition exponential smoothing (STES) method against the well-known generalized autoregressive conditional heteroskedasticity (GARCH) model in one-step-ahead volatility forecasting. While the GARCH model captured most of the stylized facts of the financial time series, threats of outliers in the leptokurtic distributed series remain unresolved. The study compared volatility forecasting performance of a total of 22 models and methods comprising STES, GARCH, and some ad-hoc forecasting. The daily returns of seven mutual fund indices (derived from 57 individual equity mutual funds) under two different economic conditions (sub-periods) were applied across all competing models. Findings revealed that the STES method with error and absolute error as transition variables emerged as the best post-sample volatility forecasting model in both sub-periods with and without financial crisis impact, as verified by model confidence set (MCS) procedure. The implications based on the results are: (1) both the sign and size of yesterday’s news shock have an impact on today’s volatility; (2) the STES method is resilient to outliers, and hence superior to GARCH and other volatility forecasting approaches examined. This study contributes an empirical approach in forecasting the risk of mutual funds investment for investors and fund managers, as well as extending the scope of volatility forecasting literature into the less explored mutual funds.

【 授权许可】

CC BY