Non-parametric news impact curve: a variational approach

URL des Documents de travail : http://ces.univ-paris1.fr/cesdp/cesdp2015.htmlDocuments de travail du Centre d'Economie de la Sorbonne 2015.86RR - ISSN: 1955-611X - Version originale Septembre 2015, révisée en juillet 2016, révisée en février 2017 Ancien titre : "A fully non-parametric heteroskedastic model".In this paper, we propose an innovative methodology for modelling the news impact curve. The news impact curve provides a non-linear relation between past returns and current volatility and thus enables to forecast volatility. Our news impact curve is the solution of a dynamic optimization problem based on variational calculus. Consequently, it is a non-parametric and smooth curve. To our knowledge, this is the first time that such a method is used for volatility modelling. Applications on simulated heteroskedastic processes as well as on financial data show a better accuracy in estimation and forecast for this approach than for standard parametric (symmetric or asymmetric ARCH) or non-parametric (Kernel-ARCH) econometric techniques