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Forecasting the density of asset returns

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Author Info

  • Trino-Manuel Niguez
  • Javier Perote

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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File URL: http://eprints.lse.ac.uk/6845/
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Bibliographic Info

Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 6845.

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Length: 28 pages
Date of creation: Oct 2004
Date of revision:
Handle: RePEc:ehl:lserod:6845

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Related research

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

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Cited by:
  1. Del Brio, Esther B. & Ñíguez, Trino-Manuel & Perote, Javier, 2011. "Multivariate semi-nonparametric distributions with dynamic conditional correlations," International Journal of Forecasting, Elsevier, vol. 27(2), pages 347-364.

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