How Relevant is Volatility Forecasting for Financial Risk Management?

40 Pages Posted: 7 Oct 1999

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)

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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 can 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 be much less important at longer horizons.

JEL Classification: C12, G10

Suggested Citation

Christoffersen, Peter and Diebold, Francis X., How Relevant is Volatility Forecasting for Financial Risk Management?. Review of Economics and Statistics. Available at SSRN: https://ssrn.com/abstract=184609 or http://dx.doi.org/10.2139/ssrn.184609

Peter Christoffersen (Contact Author)

University of Toronto - Rotman School of Management ( email )

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Copenhagen Business School

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Aarhus University - CREATES

School of Economics and Management
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DK-8000 Aarhus C
Denmark

Francis X. Diebold

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
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Philadelphia, PA 19104-6297
United States
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215-573-4217 (Fax)

HOME PAGE: http://www.ssc.upenn.edu/~fdiebold/

National Bureau of Economic Research (NBER)

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