Risk Everywhere: Modeling and Managing Volatility

54 Pages Posted: 28 Jan 2016 Last revised: 22 Mar 2017

See all articles by Tim Bollerslev

Tim Bollerslev

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

Benjamin Hood

Parametric Portfolio Associates, LLC

John Huss

AQR Capital Management, LLC

Lasse Heje Pedersen

AQR Capital Management, LLC; Copenhagen Business School - Department of Finance; New York University (NYU); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: March 21, 2017

Abstract

Based on a unique high-frequency dataset for more than fifty commodities, currencies, equity indices, and fixed income instruments spanning more than two decades, we document strong similarities in realized volatilities patterns across assets and asset classes. Exploiting these similarities within and across asset classes in panel-based estimation of new realized volatility models results in superior out-of-sample risk forecasts, compared to forecasts from existing models and more conventional procedures that do not incorporate the information in the high-frequency intraday data and/or the similarities in the volatilities. A utility-based framework designed to evaluate the economic gains from risk modeling highlights the interplay between parsimony of model specification, transaction costs, and speed of trading in the practical implementation of the different risk models.

Keywords: Market and volatility risk, high-frequency data, realized volatility, risk modeling and forecasting, volatility trading, risk targeting, realized utility

JEL Classification: C22, C51, C53, C58

Suggested Citation

Bollerslev, Tim and Hood, Benjamin and Huss, John and Pedersen, Lasse Heje, Risk Everywhere: Modeling and Managing Volatility (March 21, 2017). Available at SSRN: https://ssrn.com/abstract=2722591 or http://dx.doi.org/10.2139/ssrn.2722591

Tim Bollerslev

Duke University - Finance ( email )

Durham, NC 27708-0120
United States
919-660-1846 (Phone)
919-684-8974 (Fax)

Duke University - Department of Economics

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Benjamin Hood

Parametric Portfolio Associates, LLC ( email )

7310 Columbia Center
701 5th Avenue
Seattle, WA 98104
United States

John Huss

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Lasse Heje Pedersen (Contact Author)

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

New York University (NYU) ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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