A Mixture Multiplicative Error Model for Realized Volatility

A multiplicative error model with time-varying parameters and an error term following a mixture of gamma distributions is introduced. The model is fitted to the daily realized volatility series of Deutschemark/Dollar and Yen/Dollar returns and is shown to capture the conditional distribution of these variables better than the commonly used ARFIMA model. The forecasting performance of the new model is found to be, in general, superior to that of the set of volatility models recently considered by Andersen et al. (2003) for the same data.