Practical Volatility Modeling for Financial Market Risk Management
AbstractBeing able to choose most suitable volatility model and distribution specification is a more demanding task. This paper introduce an analyzing procedure using the Kullback-Leibler information criteria (KLIC) as a statistical tool to evaluate and compare the predictive abilities of possibly misspecified density forecast models. The main advantage of this statistical tool is that we use the censored likelihood functions to compute the tail minimum of the KLIC, to compare the performance of a density forecast models in the tails. We include an illustrative simulation and an empirical application to compare a set of distributions, including symmetric/asymmetric distribution, and a family of GARCH volatility models. We highlight the use of our approach to a daily index, the Kuala Lumpur Composite index (KLCI). Our results shows that the choice of the conditional distribution appear to be a more dominant factor in determining the adequacy of density forecasts than the choice of volatility model. Furthermore, the results support the Skewed for KLCI return distribution.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 9790.
Date of creation: 20 Aug 2007
Date of revision: 15 May 2008
Density forecast; Conditional distribution; Forecast accuracy; KLIC; GARCH models;
Find related papers by JEL classification:
- D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-08-06 (All new papers)
- NEP-ECM-2008-08-06 (Econometrics)
- NEP-ETS-2008-08-06 (Econometric Time Series)
- NEP-FMK-2008-08-06 (Financial Markets)
- NEP-FOR-2008-08-06 (Forecasting)
- NEP-RMG-2008-08-06 (Risk Management)
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