Time-Varying Realized GARCH Models for Tracking Measurement Error Bias in Volatility Forecasting

37 Pages Posted: 9 Apr 2020

See all articles by Richard H. Gerlach

Richard H. Gerlach

University of Sydney

Antonio Naimoli

affiliation not provided to SSRN

Giuseppe Storti

CSEF - University of Naples Federico II; CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF)

Date Written: March 12, 2020

Abstract

This paper proposes novel approaches to the modeling of attenuation bias effects in volatility forecasting. Our strategy relies on suitable generalizations of the Realized GARCH model by Hansen et al. (2012) where the impact of lagged realized measures on the current conditional variance is weighted according to the accuracy of the measure itself at that specific time point. This feature allows assigning more weight to lagged volatilities when they are more accurately measured. The merits of the proposed specifications are assessed by means of an application to the prediction of Value at Risk (VaR) and Expected Shortfall (ES) for a set of stock market indices. The results of the empirical analysis show that the proposed specifications are able to outperform standard Realized GARCH models in VaR and ES forecasting.

Keywords: Realized GARCH, Realized Volatility, Realized Quarticity, Attenuation Bias, Measurement Error, Tail Risk Forecasting

JEL Classification: C58, C22, C53

Suggested Citation

Gerlach, Richard H. and Naimoli, Antonio and Storti, Giuseppe, Time-Varying Realized GARCH Models for Tracking Measurement Error Bias in Volatility Forecasting (March 12, 2020). Available at SSRN: https://ssrn.com/abstract=3553270 or http://dx.doi.org/10.2139/ssrn.3553270

Richard H. Gerlach

University of Sydney ( email )

Room 483, Building H04
University of Sydney
Sydney, NSW 2006
Australia
+ 612 9351 3944 (Phone)
+ 612 9351 6409 (Fax)

HOME PAGE: http://www.econ.usyd.edu.au/staff/richardg

Antonio Naimoli

affiliation not provided to SSRN

Giuseppe Storti (Contact Author)

CSEF - University of Naples Federico II ( email )

Via John Paul II, 132
Fisciano (SA), 84084
Italy

CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF) ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

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