Realized volatility models and alternative Value-at-Risk prediction strategies |
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| Institution: | 1. Financial Engineering Research Unit, Department of Management Science and Technology, Athens University of Economics and Business, 47A Evelpidon Str., 11362 Athens, Greece;2. Bank of Greece, Financial Stability Department, 3 Amerikis Str., 105 64 Athens, Greece;1. Department of Mathematics, University of Bologna, Italy;2. Scuola Normale Superiore, Piazza dei Cavalieri, 7, Pisa (PI) 56126, Italy;3. Quantitative Life Science Section, The Abdus Salam International Center for Theoretical Physics (ICTP), Trieste, Italy;1. Research Laboratory for Economy, Management and Quantitative Finance (LaREMFiQ), IHEC, University of Sousse, Tunisia;2. LaREMFiQ, IHEC, University of Sousse, Tunisia;1. Department of Economics, University of Kiel, Kiel, Germany;2. Bank of Spain Chair of Computational Economics, Department of Economics, University Jaume I, Castellón, Spain;3. Center of Quantitative Economics, University of Münster, Germany;4. Department of Economics, University of Pretoria, South Africa |
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| Abstract: | We assess the Value-at-Risk (VaR) forecasting performance of recently proposed realized volatility (RV) models combined with alternative parametric and semi-parametric quantile estimation methods. A benchmark inter-daily GJR-GARCH model is also employed. Based on four asset classes, i.e. equity, FOREX, fixed income and commodity, and a turbulent six year out-of-sample period (2007–2013), we find that statistical accuracy and regulatory compliance is essentially improved when we use quantile methods which account for the fat tails and the asymmetry of the innovations distribution. In particular, empirical analysis gives evidence in favor of the skewed student distribution and the Extreme Value Theory (EVT) method. Nonetheless, efficiency of VaR estimates, as defined by the minimization of Basel II capital requirements and its opportunity costs, is reassured only with the use of realized volatility models. Overall, empirical evidence support the use of an asymmetric HAR realized volatility model coupled with the EVT method since it produces statistically accurate VaR forecasts which comply with Basel II accuracy mandates and allows for more efficient capital allocations. |
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