How Relevant is Volatility Forecasting for Financial Risk Management?

27 Pages Posted: 17 Sep 1999 Last revised: 11 Oct 2010

See all articles by Peter Christoffersen

Peter Christoffersen

University of Toronto - Rotman School of Management; Copenhagen Business School; Aarhus University - CREATES

Francis X. Diebold

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 4 versions of this paper

Date Written: December 1998

Abstract

It depends. If volatility fluctuates in a forecastable way, then volatility forecasts are useful for risk management; hence the interest in volatility forecastability in the risk management literature. Volatility forecastability, however, varies with horizon, and different horizons are relevant in different applications. Moreover, existing assessments of volatility forecastability are plagued by the fact that they are joint assessments of volatility forecastability and an assumed model, and the results vary not only with the horizon, but also with the assumed model. To address this problem, we develop a model-free procedure for assessing volatility forecastability across horizons. Perhaps surprisingly, we find that volatility forecastability decays quickly with horizon. Volatility forecastability, although clearly of relevance for risk management at the short horizons relevant for, say, trading desk management, may not be important for risk management more generally.

Suggested Citation

Christoffersen, Peter and Diebold, Francis X., How Relevant is Volatility Forecasting for Financial Risk Management? (December 1998). NBER Working Paper No. w6844. Available at SSRN: https://ssrn.com/abstract=145016

Peter Christoffersen

University of Toronto - Rotman School of Management ( email )

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Copenhagen Business School

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Aarhus University - CREATES

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Francis X. Diebold (Contact Author)

University of Pennsylvania - Department of Economics ( email )

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United States
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