Evaluating Density Forecasts with Applications to Financial Risk Management

Abstract

Density forecasting is increasingly more important and commonplace, forexample in financial risk management, yet little attention has been given to theevaluation of density forecasts. We develop a simple and operational frameworkfor density forecast evaluation. We illustrate the framework with adetailed application to density forecasting of asset returns in environments withtime-varying volatility. Finally, we discuss several extensions.