Volatility Forecasting Based on Cyclical Two-Component Model: Evidence from Chinese Futures Markets and Sector Stocks

This article aims to study the schemes of forecasting the volatilities of Chinese futures markets and sector stocks. An improved method based on the cyclical two-component model (CTCM) introduced by Harris et al. in 2011 is provided. The performance of CTCM is compared with the benchmark model: Heterogeneous Autoregressive model of Realized Volatility type (HAR-RV type). The impact of open interest for futures market is included in HAR-RV type model. We employ 3 different evaluation rules to determine the most efficient models when the results of different evaluation rules are inconsistent. The empirical results show that CTCM is more accurate than HAR-RV type in both estimation and forecasting. The results also show that the realized range-based tripower volatility (RTV) is the most efficient estimator for both Chinese futures markets and sector stocks.