Comparison of Volatility Measures: A Risk Management Perspective

Brownlees, Christian T.; Gallo, Giampiero M.

doi:10.2139/ssrn.1070321

Comparison of Volatility Measures: A Risk Management Perspective

Universita' di Firenze, Dipartimento di Statistica G. Parenti Working Paper No. 2008-3

38 Pages Posted: 12 Dec 2007 Last revised: 27 Apr 2009

See all articles by Christian T. Brownlees

Christian T. Brownlees

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences; Barcelona Graduate School of Economics (Barcelona GSE)

Corte dei Conti - Italian Court of Audits; University of Bologna - Rimini Center for Economic Analysis (RCEA); Universita' di Firenze - Dipartimento di Statistica, Informatica, Applicazioni "G.Parenti"

There are 2 versions of this paper

Date Written: April 2009

Abstract

In this paper we address the issue of forecasting Value-at-Risk (VaR) using different volatility measures: realized volatility, bipower realized volatility, two scales realized volatility, realized kernel as well as the daily range. We propose a dynamic model with a flexible trend specification bonded with a penalized maximum likelihood estimation strategy: the P-Spline Multiplicative Error Model. Exploiting UHFD volatility measures, VaR predictive ability is considerably improved upon relative to a baseline GARCH but not so relative to the range; there are relevant gains from modeling volatility trends and using realized kernels that are robust to dependent microstructure noise.

Keywords: Volatility Measures, VaR Forecasting, GARCH, MEM, P-Splines

JEL Classification: C22, C51, C52, C53

Suggested Citation: Suggested Citation

Brownlees, Christian T. and Gallo, Giampiero M., Comparison of Volatility Measures: A Risk Management Perspective (April 2009). Universita' di Firenze, Dipartimento di Statistica G. Parenti Working Paper No. 2008-3, Available at SSRN: https://ssrn.com/abstract=1070321 or http://dx.doi.org/10.2139/ssrn.1070321