Evaluation of Realized Volatility Predictions from Models with Leptokurtically and Asymmetrically Distributed Forecast Errors

30 Pages Posted: 26 Oct 2018

See all articles by Stavros Antonios Degiannakis

Stavros Antonios Degiannakis

Department of Economic and Regional Development, Panteion University of Political and Social Sciences

Alexandra Livada

Athens University of Economics and Business - Department of Statistics

Date Written: November 2013

Abstract

Accurate volatility forecasting is a key determinant for portfolio management, risk management and economic policy. The paper provides evidence that the sum of squared standardized forecast errors is a reliable measure for model evaluation when the predicted variable is the intra-day realized volatility. The forecasting evaluation is valid for standardized forecast errors with leptokurtic distribution as well as with leptokurtic and asymmetric distribution. Additionally, the widely applied forecasting evaluation function, the predicted mean squared error, fails to select the adequate model in the case of models with residuals that are leptokurtically and asymmetrically distributed. Hence, the realized volatility forecasting evaluation should be based on the standardized forecast errors instead of their unstandardized version.

Keywords: integrated volatility, intra-day, predicted mean squared error, realized volatility, standardized prediction error criterion, simulating forecast errors, ultra-high frequency, volatility forecasting evaluation

JEL Classification: G17; G15; C15; C32; C53

Suggested Citation

Degiannakis, Stavros Antonios and Livada, Alexandra, Evaluation of Realized Volatility Predictions from Models with Leptokurtically and Asymmetrically Distributed Forecast Errors (November 2013). Available at SSRN: https://ssrn.com/abstract=3259862 or http://dx.doi.org/10.2139/ssrn.3259862

Stavros Antonios Degiannakis (Contact Author)

Department of Economic and Regional Development, Panteion University of Political and Social Sciences ( email )

136 Sygrou
Athens
Greece

Alexandra Livada

Athens University of Economics and Business - Department of Statistics ( email )

Athens
Greece

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