Horizon Problems and Extreme Events in Financial Risk Management

Abstract

Is volatility forecastability important for long-horizon risk management, or is a traditional constant-volatility assumption adequate? In this paper, the authors address this question, exploring the interface between long-horizon financial risk management and long-horizon volatility forecastability and, in particular, whether long-horizon volatility is forecastable enough such that volatility models are useful for long-horizon risk management.

Keywords: capital regulation

JEL Classification: G2, G3