Realized Volatility Risk
AbstractIn this paper we show that realized variation measures constructed from high- frequency returns reveal a large degree of volatility risk in stock and index returns, where we characterize volatility risk by the extent to which forecasting errors in realized volatility are substantive. Even though returns standardized by ex post quadratic variation measures are nearly Gaussian, this unpredictability brings greater uncertainty to the empirically relevant ex ante distribution of returns. Explicitly modeling this volatility risk is fundamental. We propose a dually asymmetric realized volatility model, which incorporates the fact that realized volatility series are systematically more volatile in high volatility periods. Returns in this framework display time varying volatility, skewness and kurtosis. We provide a detailed account of the empirical advantages of the model using data on the S&P 500 index and eight other indexes and stocks.
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Bibliographic InfoPaper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 753.
Date of creation: Dec 2010
Date of revision:
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Postal: Yoshida-Honmachi, Sakyo-ku, Kyoto 606-8501
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More information through EDIRC
Realized volatility; volatility of volatility; volatility risk; value-at-risk; forecasting; conditional heteroskedasticity.;
Other versions of this item:
- David E. Allen & Michael McAleer & Marcel Scharth, 2010. "Realized Volatility Risk," Working Papers in Economics 10/26, University of Canterbury, Department of Economics and Finance.
- David E. Allen & Michael McAleer & Marcel Scharth, 2009. "Realized Volatility Risk," CIRJE F-Series CIRJE-F-693, CIRJE, Faculty of Economics, University of Tokyo.
- David E. Allen & Michael McAleer & Marcel Scharth, 2009. "Realized Volatility Risk," CARF F-Series CARF-F-197, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo, revised Jan 2010.
- NEP-ALL-2011-01-03 (All new papers)
- NEP-BEC-2011-01-03 (Business Economics)
- NEP-ETS-2011-01-03 (Econometric Time Series)
- NEP-FOR-2011-01-03 (Forecasting)
- NEP-MST-2011-01-03 (Market Microstructure)
- NEP-RMG-2011-01-03 (Risk Management)
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- Siem Jan Koopman & Marcel Scharth, 2011.
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Tinbergen Institute Discussion Papers
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- Siem Jan Koopman & Marcel Scharth, 2012. "The Analysis of Stochastic Volatility in the Presence of Daily Realized Measures," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 11(1), pages 76-115, December.
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