What are the steps of forecasting realised volatility of swap rates using EViews?

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DavidG93
Posts: 3
Joined: Sat Aug 18, 2018 8:59 am

What are the steps of forecasting realised volatility of swap rates using EViews?

Postby DavidG93 » Sat Aug 18, 2018 1:02 pm

One part of my dissertation involves forecasting the realised volatilities of interest rates. I know that I have to first model the realised variance as a garch process.

So, what I have done so far is, I got the swap rates from 2000-2006. Then, I calculated the logarithmic daily changes of them. Afterwards, I estimated a GARCH 1,1 process (although I am not sure if that was done right).

Then, my next forecast equation (in theory) is rt+h = c0 = c1*rt-1+h + e
rt = logarithmic daily changes
h= forecast period

How do I now forecast the realised variance for the next 10 years e.g.?
Since I am not the best at using EViews, I would appreciate any help/hints/assistance!

pvestia
Posts: 14
Joined: Wed Apr 18, 2018 4:35 am

Re: What are the steps of forecasting realised volatility of swap rates using EViews?

Postby pvestia » Sat Aug 18, 2018 1:24 pm

can you post the workfile?
Is easier to see what you need to do and understand what are you doing.

DavidG93
Posts: 3
Joined: Sat Aug 18, 2018 8:59 am

Re: What are the steps of forecasting realised volatility of swap rates using EViews?

Postby DavidG93 » Mon Aug 20, 2018 8:07 am

Sure, Sorry I didn't do that earlier!
Attachments
ForecastSwaps.wf1
(96.57 KiB) Downloaded 11 times

pvestia
Posts: 14
Joined: Wed Apr 18, 2018 4:35 am

Re: What are the steps of forecasting realised volatility of swap rates using EViews?

Postby pvestia » Mon Aug 20, 2018 9:04 am

Hello David,

After checking the correlogram of rt it seems to follow an ARMA(1,1) which you have to estimate the "rt c ar(1) ma(1)".
After that you need to conduct the Heteroskedasticity Test, which confirms the ARCH effects. so You need to estimate the ARMA(1,1)-GARCH(1,1).
After that to perorm the out-sample forecast, You need to rearrange you range size and than perform the forecast with the method you want and for the sample you want.
I will attache the screenshot explaining and the workfile.
Attachments
david.jpg
david.jpg (153.83 KiB) Viewed 179 times
forecastswaps.wf1
(104.81 KiB) Downloaded 11 times

DavidG93
Posts: 3
Joined: Sat Aug 18, 2018 8:59 am

Re: What are the steps of forecasting realised volatility of swap rates using EViews?

Postby DavidG93 » Mon Aug 20, 2018 10:09 am

Hi pvestia,

Thank you for your quick answer!
I adjusted the range size, however, when I do the dynamic forecast, there is only a straight line from 2006 onward. Any idea why?
If I'm right, I can't use the static forecasting, since I don't have the actual values, correct?

forecast.JPG
forecast.JPG (140.66 KiB) Viewed 173 times

pvestia
Posts: 14
Joined: Wed Apr 18, 2018 4:35 am

Re: What are the steps of forecasting realised volatility of swap rates using EViews?

Postby pvestia » Mon Aug 20, 2018 2:23 pm

Hello, Yes with the static forecast you are only abble to forecast One-period because you only have an auto-regressive lag. The result of the dynamic forecast in Eviews I don't understand them quite well. They should converge to zero, but is kind of odd being straight line, I don't know is suppose to be like that.

One thing you can do, I'm trying something similar, is to perform multiples static forecasts in a loop. I don't know with this procedure I'm proposing you doesn't generate regressor bias, but you can give it a try.

I will give you a code, I didn't resize the data in my workfile because is irregular and I don't know the dates you want. To use the code you just go to Files\New\Program and then copy and run it.

Code: Select all

' number of obseration you added to the range  for your forecast
' based on you screen shot the number is 5211-2600=2611
!x = 2611

'THE LOOP STARTS

'define loop for the forecast
for !i=1 to !x

'make the ARMA-GARCH
smpl @first @first+2598+!i
equation arma_garch.arch(1,1) rt c ar(1) ma(1)

'perform the static forecast
arma_garch.makemodel(mod1)
smpl @first+2599+!i  @first+2599+!i
mod1.solve(d=s)
smpl @all
series rt = rt_0

'delete the auxiliar
delete rt_0

next


After you done this, you estimate again the ARMA(1,1)-GARCH(1,1) and do a static forecast for the all range and see what you got.


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