Quantile forecasts of daily exchange rate returns from forecasts of realized volatility
Quantile forecasts are central to risk management decisions because of the widespread use of Value-at-Risk. A quantile forecast is the product of two factors: the model used to forecast volatility, and the method of computing quantiles from the volatility forecasts. In this paper we calculate and ev...
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Published in | Journal of empirical finance Vol. 15; no. 4; pp. 729 - 750 |
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Main Authors | , , |
Format | Journal Article |
Language | English |
Published |
Elsevier B.V
01.09.2008
Elsevier |
Series | Journal of Empirical Finance |
Subjects | |
Online Access | Get full text |
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Summary: | Quantile forecasts are central to risk management decisions because of the widespread use of Value-at-Risk. A quantile forecast is the product of two factors: the model used to forecast volatility, and the method of computing quantiles from the volatility forecasts. In this paper we calculate and evaluate quantile forecasts of the daily exchange rate returns of five currencies. The forecasting models that have been used in recent analyses of the predictability of daily realized volatility permit a comparison of the predictive power of different measures of intraday variation and intraday returns in forecasting exchange rate variability. The methods of computing quantile forecasts include making distributional assumptions for future daily returns as well as using the empirical distribution of predicted standardized returns with both rolling and recursive samples. Our main findings are that the Heterogenous Autoregressive model provides more accurate volatility and quantile forecasts for currencies which experience shifts in volatility, such as the Canadian dollar, and that the use of the empirical distribution to calculate quantiles can improve forecasts when there are shifts. |
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Bibliography: | ObjectType-Article-2 SourceType-Scholarly Journals-1 ObjectType-Feature-1 content type line 23 |
ISSN: | 0927-5398 1879-1727 |
DOI: | 10.1016/j.jempfin.2007.12.001 |