Model Complexity and Out-of-Sample Performance: Evidence from S&P 500 Index Returns

Andreas Kaeck, Paulo Rodrigues, Norman J. Seeger*

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review

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We apply a range of out-of-sample specification tests to more than forty competing stochastic volatility models to address how model complexity affects out-of-sample performance. Using daily S&P 500 index returns, model confidence set estimations provide strong evidence that the most important model feature is the non-affinity of the variance process. Despite testing alternative specifications during the turbulent market regime of the global financial crisis of 2008, we find no evidence that either finite- or infinite-activity jump models or other previously proposed model extensions improve the out-of-sample performance further. Applications to Value-at-Risk demonstrate the economic significance of our results. Furthermore, the out-of-sample results suggest that standard jump diffusion models are misspecified.

Original languageEnglish
Pages (from-to)1-29
Number of pages29
JournalJournal of Economic Dynamics and Control
Early online date5 Feb 2018
Publication statusPublished - May 2018


  • Forecasting
  • Jump-diffusion models
  • Lévy-jump models
  • Non-affine variance models
  • Out-of-sample specification tests

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