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
Date Written: April 2009
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
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