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Bayesian realized-GARCH models for financial tail risk forecasting incorporating the two-sided Weibull distribution

Author

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  • Chao Wang
  • Qian Chen
  • Richard Gerlach

Abstract

The realized-GARCH framework is extended to incorporate the two-sided Weibull distribution, for the purpose of volatility and tail risk forecasting in a financial time series. Further, the realized range, as a competitor for realized variance or daily returns, is employed as the realized measure in the realized-GARCH framework. Sub-sampling and scaling methods are applied to both the realized range and realized variance, to help deal with inherent micro-structure noise and inefficiency. A Bayesian Markov Chain Monte Carlo (MCMC) method is adapted and employed for estimation and forecasting, while various MCMC efficiency and convergence measures are employed to assess the validity of the method. In addition, the properties of the MCMC estimator are assessed and compared with maximum likelihood, via a simulation study. Compared to a range of well-known parametric GARCH and realized-GARCH models, tail risk forecasting results across seven market indices, as well as two individual assets, clearly favour the proposed realized-GARCH model incorporating the two-sided Weibull distribution; especially those employing the sub-sampled realized variance and sub-sampled realized range.

Suggested Citation

  • Chao Wang & Qian Chen & Richard Gerlach, 2019. "Bayesian realized-GARCH models for financial tail risk forecasting incorporating the two-sided Weibull distribution," Quantitative Finance, Taylor & Francis Journals, vol. 19(6), pages 1017-1042, June.
    • Handle: RePEc:taf:quantf:v:19:y:2019:i:6:p:1017-1042
    DOI: 10.1080/14697688.2018.1540880
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    Cited by:

    1. Yuta Kurose, 2021. "Stochastic volatility model with range-based correction and leverage," Papers 2110.00039, arXiv.org, revised Oct 2021.
    2. Zhengkun Li & Minh-Ngoc Tran & Chao Wang & Richard Gerlach & Junbin Gao, 2020. "A Bayesian Long Short-Term Memory Model for Value at Risk and Expected Shortfall Joint Forecasting," Papers 2001.08374, arXiv.org, revised May 2021.
    3. Papantonis Ioannis & Tzavalis Elias & Agapitos Orestis & Rompolis Leonidas S., 2023. "Augmenting the Realized-GARCH: the role of signed-jumps, attenuation-biases and long-memory effects," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 27(2), pages 171-198, April.
    4. Amaro, Raphael & Pinho, Carlos, 2022. "Energy commodities: A study on model selection for estimating Value-at-Risk," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 68, pages 5-27.
    5. Chen, Cathy W.S. & Watanabe, Toshiaki & Lin, Edward M.H., 2023. "Bayesian estimation of realized GARCH-type models with application to financial tail risk management," Econometrics and Statistics, Elsevier, vol. 28(C), pages 30-46.
    6. Vica Tendenan & Richard Gerlach & Chao Wang, 2020. "Tail risk forecasting using Bayesian realized EGARCH models," Papers 2008.05147, arXiv.org, revised Aug 2020.

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