Are realized volatility models good candidates for alternative Value at Risk prediction strategies?

Louzis, Dimitrios P. and Xanthopoulos-Sisinis, Spyros and Refenes, Apostolos P. (2011): Are realized volatility models good candidates for alternative Value at Risk prediction strategies?

Abstract

In this paper, we assess the Value at Risk (VaR) prediction accuracy and efficiency of six ARCH-type models, six realized volatility models and two GARCH models augmented with realized volatility regressors. The α-th quantile of the innovation’s distribution is estimated with the fully parametric method using either the normal or the skewed student distributions and also with the Filtered Historical Simulation (FHS), or the Extreme Value Theory (EVT) methods. Our analysis is based on two S&P 500 cash index out-of-sample forecasting periods, one of which covers exclusively the recent 2007-2009 financial crisis. Using an extensive array of statistical and regulatory risk management loss functions, we find that the realized volatility and the augmented GARCH models with the FHS or the EVT quantile estimation methods produce superior VaR forecasts and allow for more efficient regulatory capital allocations. The skewed student distribution is also an attractive alternative, especially during periods of high market volatility.

• Item Type: MPRA Paper
• Language: English
• Keywords: High frequency intraday data; Filtered Historical Simulation; Extreme Value Theory; Value-at-Risk forecasting; Financial crisis.
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C13 - Estimation: General; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C53 - Forecasting and Prediction Methods ; Simulation Methods; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

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