On Variable Selection for Volatility Forecasting: The Role of Focused Selection Criteria
Posted: 16 Oct 2008
Date Written: Fall 2008
This paper is concerned with the issues of modeling and projecting the dynamics of volatility when a group of potentially useful predetermined variables is available. We predict realized volatility and value at risk (VaR) with a nested set of multiplicative error models for realized volatility. We make use of recently proposed focused model selection/combination strategies as well as the classic AIC/BIC. Focused strategies consist of choosing the model that minimizes the estimated MSE of a given function of the parameters of interest to the forecaster. Results show that VaR forecasts can significantly be improved upon using focused prediction strategies.
Keywords: C22, C52, C53, focused information criteria, forecasting, model selection, realized volatility, value at risk
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