The Business Cycle’s Impact on Volatility Forecasting: Recapturing Intrinsic Jump Components
Year: 2025
Type: article
Abstract: The stock’s leverage effect and realized volatility (RV) in response to asymmetric jumps in economic expansion and contraction are examined. The proposed model combines the heterogeneous autoregressive-realized volatility model (HAR) with the regime switching model. A case-control study is implemented using a control group and a case group with which the asymmetric jump-risk effects on RV are compared with the positive and negative realized semi-variance (RSV) in the stock market. The asymmetric jumps and the leverage effect that depend on the state of a business cycle are modeled into an extend HAR model.Our empirical results reveal several noteworthy findings. The business cycle effect can offset the jump risk effect, which results in insignificance of the intrinsic significant coefficients associated with the jump components. The accuracy of the estimated RV parameters depends on the state of the economy. Moreover, the asymmetric jumps that depend on the state of the economy can lead to more bad surprises in RSV for the stock market, which has a significant dominant effect in an economic contraction period. A bad surprise strengthens the stock’s leverage effect in an economic contraction. In addition, the business cycle effect should be included in examining the relationship between volatility and jump risk, and thereby capable of recapturing the intrinsic significant jump-risk component, which has been ignored by former researchers. The inclusion of the business cycle effect can produce a higher accurate estimate of realized volatility in option pricing.
Source: Risks
Authors: Son-Nan Chen, Pao-Peng Hsu
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: gold
Estimated APC paid: $2,172
OpenAlex ID: W4415908792