On the economic benefit of utility based estimation of a volatility model
Forecasts of asset return volatility are necessary for many financial applications, including portfolio allocation. Traditionally, the parameters of econometric models used to generate volatility forecasts are estimated in a statistical setting and subsequently used in an economic setting such as portfolio allocation. Differences in the criteria under which the model is estimated and applied may inhibit reduce the overall economic benefit of a model in the context of portfolio allocation. This paper investigates the economic benefit of direct utility based estimation of the parameters of a volatility model and allows for practical issues such as transactions costs to be incorporated within the estimation scheme. In doing so, we compare the benefits stemming from various estimators of historical volatility in the context of portfolio allocation. It is found that maximal utility based estimation, taking into account transactions costs, of a simple volatility model is preferred on the basis of greater realized utility. Estimation of models using historical daily returns is preferred over historical realized volatility.
|Date of creation:||21 Jul 2009|
|Date of revision:|
|Contact details of provider:|| Phone: 07 3138 5066|
Fax: 07 3138 1500
Web page: http://www.ncer.edu.au
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:qut:auncer:2009_57. 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: (School of Economics and Finance)The email address of this maintainer does not seem to be valid anymore. Please ask School of Economics and Finance to update the entry or send us the correct address
If references are entirely missing, you can add them using this form.