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Do Power GARCH models really improve value-at-risk forecasts?

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  • Ané

Abstract

Traditional heteroskedastic models either rely on the specification of the conditional variance as in Bollerslev (1986) or on a direct modeling of the conditional standard deviation as in Taylor (1986). With its endogenous estimation of the optimal power transformation, the Power GARCH (PGARCH) of Ding, Granger, and Engle (1993) represents a flexible alternative that also nests the previous competing families. Building on a “dynamic” estimation and out-of-sample tests, the current paper undertakes a comparison of the three models in a value-at-risk setting. Despite existing fluctuations in the optimal power transformation obtained with the Ding, Granger, and Engle model, our empirical investigations suggest that the parameter is rarely found different from one or two. Although the volatility dynamics may switch from Taylor's to Bollerslev's specification during the life of the future contract, the measures of accuracy and efficiency used to assess the performance of VaR forecasts indicate that the additional flexibility brought by the PGARCH model provides little, if any, improvement for risk management. *** DIRECT SUPPORT *** A00DH023 00004 Copyright Springer 2005

Suggested Citation

  • Ané, 2005. "Do Power GARCH models really improve value-at-risk forecasts?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 29(3), pages 337-358, September.
  • Handle: RePEc:spr:jecfin:v:29:y:2005:i:3:p:337-358
    DOI: 10.1007/BF02761579
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    1. Ding, Zhuanxin & Granger, Clive W. J. & Engle, Robert F., 1993. "A long memory property of stock market returns and a new model," Journal of Empirical Finance, Elsevier, vol. 1(1), pages 83-106, June.
    2. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    3. Tse, Y. K. & Tsui, Albert K. C., 1997. "Conditional volatility in foreign exchange rates: Evidence from the Malaysian ringgit and Singapore dollar," Pacific-Basin Finance Journal, Elsevier, vol. 5(3), pages 345-356, July.
    4. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
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    Cited by:

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    2. Ergün, A. Tolga & Jun, Jongbyung, 2010. "Time-varying higher-order conditional moments and forecasting intraday VaR and Expected Shortfall," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(3), pages 264-272, August.
    3. Erie Febrian & Aldrin Herwany, 2009. "Liquidity Measurement Based on Bid-Ask Spread, Trading Frequency, and Liquidity Ratio: The Use of GARCH Model on Jakarta Stock Exchange (JSX)," Working Papers in Economics and Development Studies (WoPEDS) 200910, Department of Economics, Padjadjaran University, revised Sep 2009.

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