How Relevant is Volatility Forecasting for Financial Risk Management?

97-45

31 Pages Posted: 18 Jan 1998

See all articles by Peter Christoffersen

Peter Christoffersen

University of Toronto - Rotman School of Management; Copenhagen Business School; Aarhus University - CREATES

Francis X. Diebold

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

Multiple version iconThere are 4 versions of this paper

Date Written: November 4, 1997

Abstract

It depends. If volatility fluctuates in a forecastable way, then volatility forecasts are useful for risk management; hence the interest in volatility forecastability in the risk management literature. Volatility forecastability, however, varies with horizon, and different horizons are relevant in different applications. Existing assessments are plagued by the fact that they are joint assessments of volatility forecastability and an assumed model, and the results vary not only with the horizon, but also with the model. To address this problem, we develop a model-free procedure for measuring volatility forecastability across horizons. Perhaps surprisingly, we find that volatility forecastability decays quickly with horizon. Volatility forecastability, although clearly of relevance for risk management at the very short horizons relevant for, say, trading desk management, may not be important for risk management more generally.

JEL Classification: C22, G12

Suggested Citation

Christoffersen, Peter and Diebold, Francis X., How Relevant is Volatility Forecasting for Financial Risk Management? (November 4, 1997). 97-45. Available at SSRN: https://ssrn.com/abstract=54001 or http://dx.doi.org/10.2139/ssrn.54001

Peter Christoffersen

University of Toronto - Rotman School of Management ( email )

105 St. George Street
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Copenhagen Business School

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Aarhus University - CREATES

School of Economics and Management
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DK-8000 Aarhus C
Denmark

Francis X. Diebold (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
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Philadelphia, PA 19104-6297
United States
215-898-1507 (Phone)
215-573-4217 (Fax)

HOME PAGE: http://www.ssc.upenn.edu/~fdiebold/

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