On Variable Selection for Volatility Forecasting: The Role of Focused Selection Criteria

Posted: 16 Oct 2008

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)

Giampiero M. Gallo

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"

Date Written: Fall 2008

Abstract

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

Suggested Citation

Brownlees, Christian T. and Gallo, Giampiero M., On Variable Selection for Volatility Forecasting: The Role of Focused Selection Criteria (Fall 2008). Journal of Financial Econometrics, Vol. 6, Issue 4, pp. 513-539, 2008, Available at SSRN: https://ssrn.com/abstract=1281995 or http://dx.doi.org/nbn012

Christian T. Brownlees (Contact Author)

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain

HOME PAGE: http://84.89.132.1/~cbrownlees/

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas 25-27
Barcelona, Catalonia 08014
Spain

Giampiero M. Gallo

Corte dei Conti - Italian Court of Audits ( email )

viale Mazzini
Roma, Roma 00195
Italy

University of Bologna - Rimini Center for Economic Analysis (RCEA) ( email )

Via Patara, 3
Rimini (RN), RN 47900
Italy

Universita' di Firenze - Dipartimento di Statistica, Informatica, Applicazioni "G.Parenti" ( email )

Viale G.B. Morgagni, 59
Florence, 50134
Italy
0039 055 2751 591 (Phone)
0039 055 4223560 (Fax)

HOME PAGE: http://www.disia.unifi.it/gallog

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