Abstract
Abstract In this paper, we provide several theoretically relevant and empirically significant improvements to the general affine realized volatility (GARV) model of Christoffersen et al. (2014) . We impose hidden volatility components in both the return-based conditional variance and the realized variance and augment their combination with another jump component. This new composition nests within a common framework several empirically well-tested models such as the GARV model mentioned above. To facilitate practical implementations we obtain the closed-form formulas to evaluate VIX and its futures through a variance-dependent kernel. Our empirical studies demonstrate that the volatility-component specification provides a further evident improvement in VIX forecasting and its futures pricing across maturity and volatility levels; more importantly, these hybrid and hidden features turn out to be complements rather than substitutes, and their prominence is further intensified by the jump.
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