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Comparison of Volatility Measures: a Risk Management Perspective

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In this paper we address the issue of forecasting Value–at–Risk (VaR) using different volatility measures: realized volatility, bipower realized volatility, two scales realized volatility, realized kernel as well as the daily range. We propose a dynamic model with a flexible trend specification bonded with a penalized maximum likelihood estimation strategy: the P-Spline Multiplicative Error Model. Exploiting UHFD volatility measures, VaR predictive ability is considerably improved upon relative to a baseline GARCH but not so relative to the range; there are relevant gains from modeling volatility trends and using realized kernels that are robust to dependent microstructure noise.

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Paper provided by Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti" in its series Econometrics Working Papers Archive with number wp2008_03.

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Date of creation: Feb 2008
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Handle: RePEc:fir:econom:wp2008_03

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Keywords: Volatility Measures; VaR Forecasting; GARCH; MEM; P-Spline.;

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