Risk Everywhere: Modeling and Managing Volatility

57 Pages Posted: 14 Feb 2018

See all articles by Tim Bollerslev

Tim Bollerslev

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

Benjamin Hood

AQR Capital Management, 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: February 2018

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

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 (February 2018). CEPR Discussion Paper No. DP12687. Available at SSRN: https://ssrn.com/abstract=3122329

Tim Bollerslev (Contact Author)

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

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

John Huss

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Lasse Heje Pedersen

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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