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Prediction accuracy of bivariate score-driven risk premium and volatility filters: an illustration for the Dow Jones

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  • Blazsek, Szabolcs
  • Licht, Adrian

Abstract

In this paper, we introduce Beta-t-QVAR (quasi-vector autoregression) for the joint modelling of score-driven location and scale. Asymptotic theory of the maximum likelihood (ML) estimatoris presented, and sufficient conditions of consistency and asymptotic normality of ML are proven. Forthe joint score-driven modelling of risk premium and volatility, Dow Jones Industrial Average (DJIA)data are used in an empirical illustration. Prediction accuracy of Beta-t-QVAR is superior to theprediction accuracies of Beta-t-EGARCH (exponential generalized AR conditional heteroscedasticity),A-PARCH (asymmetric power ARCH), and GARCH (generalized ARCH). The empirical results motivate the use of Beta-t-QVAR for the valuation of DJIA options.

Suggested Citation

  • Blazsek, Szabolcs & Licht, Adrian, 2020. "Prediction accuracy of bivariate score-driven risk premium and volatility filters: an illustration for the Dow Jones," UC3M Working papers. Economics 31339, Universidad Carlos III de Madrid. Departamento de Economía.
    • Handle: RePEc:cte:werepe:31339
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    References listed on IDEAS

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    1. Elton, John H., 1990. "A multiplicative ergodic theorem for lipschitz maps," Stochastic Processes and their Applications, Elsevier, vol. 34(1), pages 39-47, February.
    2. Harvey,Andrew C., 2013. "Dynamic Models for Volatility and Heavy Tails," Cambridge Books, Cambridge University Press, number 9781107630024.
    3. Drew Creal & Siem Jan Koopman & André Lucas, 2013. "Generalized Autoregressive Score Models With Applications," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 28(5), pages 777-795, August.
    4. Francisco Blasques & Paolo Gorgi & Siem Jan Koopman & Olivier Wintenberger, 2016. "Feasible Invertibility Conditions and Maximum Likelihood Estimation for Observation-Driven Models," Tinbergen Institute Discussion Papers 16-082/III, Tinbergen Institute.
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    More about this item

    Keywords

    Volatility;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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