MArcelo Carvalho () (DEPARTMENT ECONOMIC STATISTICS AND DECISION SUPPORT, STOCKHOLM SCHOOL OF ECONOMICS,) MArco Aurelio Freire () (BANK BOSTON) Marcelo Cunha Medeiros () (Department of Economics PUC-Rio) Leonardo Souza () (ENERGY STATISTICS SECTION UNITED NATIONS)
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The goal of this paper is twofold. First, using five of the most actively traded stocks in the Brazilian financial market, this paper shows that the normality assumption commonly used in the risk management area to describe the distributions of returns standardized by volatilities is not compatible with volatilities estimated by EWMA or GARCH models. In sharp contrast, when the information contained in high frequency data is used to construct the realized volatility measures, we attain the normality of the standardized returns, giving promise of improvements in Value-at-Risk statistics. We also describe the distributions of volatilities of the Brazilian stocks, showing that they are nearly lognormal. Second, we estimate a simple model to the log of realized volatilities that differs from the ones in other studies. The main difference is that we do not find evidence of long memory. The estimated model is compared with commonly used alternatives in an out-of-sample forecasting experiment.
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Paper provided by Department of Economics PUC-Rio (Brazil) in its series Textos para discussão with number
530.
Length: 26p Date of creation: Nov 2006 Date of revision: Publication status: Published in Revista Brasileira de Finanças, Volume 4, p.321-343, 2006 Handle: RePEc:rio:texdis:530
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Michael McAleer & Marcelo Cunha Medeiros, 2006.
"Realized volatility: a review,"
Textos para discussão
531 Publication status: F, Department of Economics PUC-Rio (Brazil).
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