Forecast combination puzzle in the HAR model

The Heterogeneous Autoregressive (HAR) model of Corsi (2009) has become the benchmark model for predicting realized volatility given its simplicity and consistent empirical performance. Many modifications and extensions to the original model have been proposed that often only provide incremental forecast improvements. In this paper, we take a step back and view the HAR model as a forecast combination that combines three predictors: previous day realization (or random walk forecast), previous week average, and previous month average. When applying the Ordinary Least Squares (OLS) to combine the predictors, the HAR model uses optimal weights that are known to be problematic in the forecast combination literature. In fact, the simple average forecast often outperforms the optimal combination in many empirical applications. We investigate the performance of the simple average forecast for the realized volatility of the Dow Jones Industrial Average equity index. We find dramatic improvements in forecast accuracy across all horizons and different time periods. This is the first time the forecast combination puzzle is identified in this context