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Forecasting the density of asset returns

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Author Info
Trino-Manuel Niguez
Javier Perote

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Abstract

In this paper we introduce a transformation of the Edgeworth-Sargan series expansion of the Gaussian distribution, that we call Positive Edgeworth-Sargan (PES). The main advantage of this new density is that it is well defined for all values in the parameter space, as well as it integrates up to one. We include an illustrative empirical application to compare its performance with other distributions, including the Gaussian and the Student's t, to forecast the full density of daily exchange-rate returns by using graphical procedures. Our results show that the proposed function outperforms the other two models for density forecasting, then providing more reliable value-at-risk forecasts.

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Paper provided by Suntory and Toyota International Centres for Economics and Related Disciplines, LSE in its series STICERD - Econometrics Paper Series with number /2004/479.

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Date of creation: Oct 2004
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Handle: RePEc:cep:stiecm:/2004/479

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Related research
Keywords: Density forecasting; Edgeworth-Sargan distribution; probability integral transformations; P-value plots; VaR;

Find related papers by JEL classification:
C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Econometric and Statistical Methods; Specific Distributions
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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  6. Fiorentini, Gabriele & Sentana, Enrique & Calzolari, Giorgio, 2003. "Maximum Likelihood Estimation and Inference in Multivariate Conditionally Heteroscedastic Dynamic Regression Models with Student t Innovations," Journal of Business & Economic Statistics, American Statistical Association, vol. 21(4), pages 532-46, October.
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  15. Francis X. Diebold & Jinyong Hahn & Anthony S. Tay, 1999. "Multivariate Density Forecast Evaluation And Calibration In Financial Risk Management: High-Frequency Returns On Foreign Exchange," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 661-673, November. [Downloadable!] (restricted)
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