Portfolio allocation: Getting the most out of realised volatility
Recent advances in the measurement of volatility have utilized high frequency intraday data to produce what are generally known as realised volatility estimates. It has been shown that forecasts generated from such estimates are of positive economic value in the context of portfolio allocation. This paper considers the link between the value of such forecasts and the loss function under which models of realised volatility are estimated. It is found that employing a utility based estimation criteria is preferred over likelihood estimation, however a simple mean squared error criteria performs in a similar manner. These findings have obvious implications for the manner in which volatility models based on realised volatility are estimated when one wishes to inform the portfolio allocation decision.
|Date of creation:||10 Mar 2010|
|Date of revision:||06 May 2010|
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- Jeff Fleming, 2001. "The Economic Value of Volatility Timing," Journal of Finance, American Finance Association, vol. 56(1), pages 329-352, 02.
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