Evidence of non-stationary bias in scaling by square root of time: Implications for Value-at-Risk
In this paper, we show that scaled conditional volatilities obtained by the square root formula applied to i.i.d residuals from a sample of Canadian stock market data for various time horizons and error distributions, typically underestimate the true conditional volatility; consistently have a higher standard deviation and exhibit non-stationary kurtosis. Furthermore, the bias produced by volatility scaling is non-stationary in mean and standard deviation and its magnitude is likely influenced by monetary policy regime shifts. Moreover, while VaR is risk-coherence for elliptical distributions, this bias remains even for this class of distributions.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 18 (2008)
Issue (Month): 3 (July)
|Contact details of provider:|| Web page: http://www.elsevier.com/locate/intfin|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Duffy, John & Engle-Warnick, Jim, 2006.
"Multiple Regimes in U.S. Monetary Policy? A Nonparametric Approach,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 38(5), pages 1363-1377, August.
- John Duffy and Jim Engle-Warnick, 2001. "Multiple Regimes in U.S. Monetary Policy? A Nonparametric Approach," Computing in Economics and Finance 2001 151, Society for Computational Economics.
- Francis X. Diebold & Andrew Hickman & Atsushi Inoue & Til Schuermann, 1997. "Converting 1-Day Volatility to h-Day Volatitlity: Scaling by Root-h is Worse Than You Think," Center for Financial Institutions Working Papers 97-34, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Jean-Pierre Zigrand & Jon Danielsson, 2003.
"On time-scaling of risk and the square–root–of–time rule,"
FMG Discussion Papers
dp439, Financial Markets Group.
- Danielsson, Jon & Zigrand, Jean-Pierre, 2006. "On time-scaling of risk and the square-root-of-time rule," Journal of Banking & Finance, Elsevier, vol. 30(10), pages 2701-2713, October.
- Jon Danielsson & Jean-Pierre Zigrand, 2003. "On time-scaling of risk and the square–root–of–time rule," LSE Research Online Documents on Economics 24827, London School of Economics and Political Science, LSE Library.
- Yanhui Liu & Parameswaran Gopikrishnan & Pierre Cizeau & Martin Meyer & Chung-Kang Peng & H. Eugene Stanley, 1999. "The statistical properties of the volatility of price fluctuations," Papers cond-mat/9903369, arXiv.org, revised Mar 1999.
- Choi, Seungmook & Kim, Benjamin J. C., 1991. "Monetary policy regime changes and the risk premium in the foreign exchange markets : A GARCH application," Economics Letters, Elsevier, vol. 37(4), pages 447-452, December.
- Drost, F.C. & Nijman, T.E., 1992.
"Temporal Aggregation of Garch Processes,"
9240, Tilburg - Center for Economic Research.
- Drost, F.C. & Nijman, T.E., 1990. "Temporal Aggregation Of Garch Processes," Papers 9066, Tilburg - Center for Economic Research.
- Drost, F.C. & Nijman, T.E., 1990. "Temporal aggregation of GARCH processes," Discussion Paper 1990-66, Tilburg University, Center for Economic Research.
- Drost, F.C. & Nijman, T.E., 1992. "Temporal aggregation of GARCH processes," Discussion Paper 1992-40, Tilburg University, Center for Economic Research.
- Hsieh, David A, 1991. " Chaos and Nonlinear Dynamics: Application to Financial Markets," Journal of Finance, American Finance Association, vol. 46(5), pages 1839-77, December.
- Lastrapes, William D, 1989. "Exchange Rate Volatility and U.S. Monetary Policy: An ARCH Application," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(1), pages 66-77, February.
- Bollerslev, Tim, 1986.
"Generalized autoregressive conditional heteroskedasticity,"
Journal of Econometrics,
Elsevier, vol. 31(3), pages 307-327, April.
- Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
- V. Vance Roley, 1986. "U.S. monetary policy regimes and U.S.-Japan financial relationships," Research Working Paper 86-03, Federal Reserve Bank of Kansas City.
- Stoll, Hans R. & Whaley, Robert E., 1990. "The Dynamics of Stock Index and Stock Index Futures Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(04), pages 441-468, December.
- Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
- Drost, F.C. & Nijman, T.E., 1993. "Temporal aggregation of GARCH processes," Other publications TiSEM 0642fb61-c7f4-4281-b484-4, Tilburg University, School of Economics and Management.
- Pesando, James E & Plourde, Andre, 1988. " The October 1979 Change in the U.S. Monetary Regime: Its Impact on the Forecastability of Canadian Interest Rates," Journal of Finance, American Finance Association, vol. 43(1), pages 217-39, March.
- David Andolfatto & Paul Gomme, 1997.
"Monetary Policy Regimes and Beliefs,"
Cahiers de recherche CREFE / CREFE Working Papers
48, CREFE, Université du Québec à Montréal, revised Apr 2001.
- David Andolfatto & Paul Gomme, 1997. "Monetary Policy Regimes and Beliefs," Working Papers 97002, University of Waterloo, Department of Economics, revised Jan 1997.
- David Andolfatto & Paul Gomme, 2001. "Monetary policy regimes and beliefs," Working Paper 9905, Federal Reserve Bank of Cleveland.
- David Andolfatto & Paul Gomme, 1997. "Monetary policy regimes and beliefs," Discussion Paper / Institute for Empirical Macroeconomics 118, Federal Reserve Bank of Minneapolis.
- Perron, P, 1988.
"The Great Crash, The Oil Price Shock And The Unit Root Hypothesis,"
338, Princeton, Department of Economics - Econometric Research Program.
- Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
- Mittoo, Usha R, 1992. " Additional Evidence on Integration in the Canadian Stock Market," Journal of Finance, American Finance Association, vol. 47(5), pages 2035-54, December.
- Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
- Daniel L. Thornton, 1990. "Do government deficits matter?," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 25-39.
- Barnett, William A. & Ronald Gallant, A. & Hinich, Melvin J. & Jungeilges, Jochen A. & Kaplan, Daniel T. & Jensen, Mark J., 1995. "Robustness of nonlinearity and chaos tests to measurement error, inference method, and sample size," Journal of Economic Behavior & Organization, Elsevier, vol. 27(2), pages 301-320, July.
When requesting a correction, please mention this item's handle: RePEc:eee:intfin:v:18:y:2008:i:3:p:272-289. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If references are entirely missing, you can add them using this form.