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A Forecast Comparison of Financial Volatility Models: GARCH (1,1) is not Enough

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  • Mapa, Dennis S.

Abstract

Asset allocation and risk calculations depend largely on volatile models. The parameters of the volatility models are estimated using either the Maximum Likelihood (ML) or the Quasi-Maximum Likelihood (QML). By comparing the out-of-sample forecasting performance of 68 ARCH-type models using inter-daily data on the peso-dollar exchange rate, this study shows that it is important to correctly specify the distribution of the asset returns and not only focus on the specification of the volatility. The forecasts are compared to the Parkinson Range, an alternative to the Realized Volatility.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 21028.

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Date of creation: 2004
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Publication status: Published in The Philippine Statistician 1-4.53(2004): pp. 1-10
Handle: RePEc:pra:mprapa:21028

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Keywords: Volatility; ARCH; Parkinson Range;

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References

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  1. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, Elsevier, vol. 31(3), pages 307-327, April.
  2. Asger Lunde & Peter Reinhard Hansen, 2001. "A Forecast Comparison of Volatility Models: Does Anything Beat a GARCH(1,1)?," Working Papers 2001-04, Brown University, Department of Economics.
  3. Neil Shephard & Ole E. Barndorff-Nielsen, 2002. "Estimating quadratic variation using realised variance," Economics Series Working Papers 2001-W20, University of Oxford, Department of Economics.
  4. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, Econometric Society, vol. 59(2), pages 347-70, March.
  5. R. F. Engle & A. J. Patton, 2001. "What good is a volatility model?," Quantitative Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 1(2), pages 237-245.
  6. Glosten, Lawrence R & Jagannathan, Ravi & Runkle, David E, 1993. " On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks," Journal of Finance, American Finance Association, American Finance Association, vol. 48(5), pages 1779-1801, December.
  7. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 987-1007, July.
  8. Parkinson, Michael, 1980. "The Extreme Value Method for Estimating the Variance of the Rate of Return," The Journal of Business, University of Chicago Press, vol. 53(1), pages 61-65, January.
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Cited by:
  1. Matei, Marius, 2010. "Risk analysis in the evaluation of the international investment opportunities. Advances in modelling and forecasting volatility for risk assessment purposes," Working Papers of Institute for Economic Forecasting 100201, Institute for Economic Forecasting.

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