A1059
Title: Prediction of linear fractional stable motions using codifference
Authors: Matthieu Garcin - ESILV (France) [presenting]
Karl Sawaya - Ecole Polytechnique Federale de Lausanne (Switzerland)
Thomas Valade - Ecole Polytechnique (France)
Abstract: The linear fractional stable motion (LFSM) extends the fractional Brownian motion (fBm) by considering $\alpha$-stable increments. A method is proposed to forecast future increments of the LFSM from past discrete-time observations, using the conditional expectation when $\alpha>1$ or a semimetric projection otherwise. It relies on the codifference, which describes the serial dependence of the process, instead of the covariance. Indeed, covariance is commonly used for predicting an fBm, but it is infinite when $\alpha<2$. Some theoretical properties of the method and of its accuracy are studied and both a simulation study and an application to real data confirm the relevance of the approach. The LFSM-based method outperforms the fBm, when forecasting high-frequency FX rates. It also shows a promising performance in the forecast of time series of volatilities, decomposing properly, in the fractal dynamic of rough volatilities, the contribution of the kurtosis of the increments, and the contribution of their serial dependence. Moreover, the analysis of hit ratios suggests that, besides independence, persistence, and antipersistence, a fourth regime of serial dependence exists for fractional processes, characterized by a selective memory controlled by a few large increments.
