Forecasting Risk with Markov-Switching GARCH Models: A Large-Scale Performance Study

International Journal of Forecasting, Vol 34, Issue 4, pp. 733-747, 2018

36 Pages Posted: 16 Feb 2017 Last revised: 28 Mar 2019

See all articles by David Ardia

David Ardia

HEC Montreal - Department of Decision Sciences

Keven Bluteau

University of Neuchatel, Institute of Financial Analysis, Students; Vrije Universiteit Brussel (VUB)

Kris Boudt

Ghent University; Vrije Universiteit Brussel; Vrije Universiteit Amsterdam

Leopoldo Catania

Aarhus University - School of Business and Social Sciences; Aarhus University - CREATES

Date Written: March 2, 2018

Abstract

We perform a large-scale empirical study to compare the forecasting performance of single-regime and Markov-switching GARCH (MSGARCH) models from a risk management perspective. We find that, for daily, weekly, and ten-day equity log-returns, MSGARCH models yield more accurate Value-at-Risk, Expected Shortfall, and left-tail distribution forecasts than their single-regime counterpart. Also, our results indicate that accounting for parameter uncertainty improves left-tail predictions, independently of the inclusion of the Markov-switching mechanism.

Keywords: GARCH, MSGARCH, forecasting performance, large-scale study, Value-at-Risk, Expected Shortfall, risk management

JEL Classification: C11, C22, C51, C53, C55, C58, G17

Suggested Citation

Ardia, David and Bluteau, Keven and Boudt, Kris and Catania, Leopoldo, Forecasting Risk with Markov-Switching GARCH Models: A Large-Scale Performance Study (March 2, 2018). International Journal of Forecasting, Vol 34, Issue 4, pp. 733-747, 2018. Available at SSRN: https://ssrn.com/abstract=2918413 or http://dx.doi.org/10.2139/ssrn.2918413

David Ardia (Contact Author)

HEC Montreal - Department of Decision Sciences ( email )

3000 Côte-Sainte-Catherine Road
Montreal, QC H2S1L4
Canada

Keven Bluteau

University of Neuchatel, Institute of Financial Analysis, Students ( email )

Pierre-a-Mazel,7
Neuchatel
Switzerland

Vrije Universiteit Brussel (VUB) ( email )

Pleinlaan 2
http://www.vub.ac.be/
Brussels, 1050
Belgium

Kris Boudt

Ghent University ( email )

Sint-Pietersplein 5
Gent, 9000
Belgium

Vrije Universiteit Brussel ( email )

Pleinlaan 2
http://www.vub.ac.be/
Brussels, 1050
Belgium

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

Leopoldo Catania

Aarhus University - School of Business and Social Sciences ( email )

Fuglesangs Allé 4
Aarhus V, DK-8210
Denmark
+4587165536 (Phone)

HOME PAGE: http://pure.au.dk/portal/en/leopoldo.catania@econ.au.dk

Aarhus University - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

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