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Large‐scale volatility models: theoretical properties of professionals’ practice

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  • Paolo Zaffaroni

Abstract

. This article examines the way in which GARCH models are estimated and used for forecasting by practitioners in particular using the highly popular RiskmetricsTM approach. Although it permits sizable computational gains and provide a simple way to impose positive semi‐definitiveness of multivariate version of the model, we show that this approach delivers non‐consistent parameter’ estimates. The novel theoretical result is corroborated by a set of Monte Carlo exercises. A set of empirical applications suggest that this could cause, in general, unreliable forecasts of conditional volatilities and correlations.

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  • Paolo Zaffaroni, 2008. "Large‐scale volatility models: theoretical properties of professionals’ practice," Journal of Time Series Analysis, Wiley Blackwell, vol. 29(3), pages 581-599, May.
    • Handle: RePEc:bla:jtsera:v:29:y:2008:i:3:p:581-599
    DOI: 10.1111/j.1467-9892.2007.00571.x
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    Cited by:

    1. Erik Kole & Thijs Markwat & Anne Opschoor & Dick van Dijk, 2017. "Forecasting Value-at-Risk under Temporal and Portfolio Aggregation," Journal of Financial Econometrics, Oxford University Press, vol. 15(4), pages 649-677.
    2. Sbrana, Giacomo & Silvestrini, Andrea, 2013. "Aggregation of exponential smoothing processes with an application to portfolio risk evaluation," Journal of Banking & Finance, Elsevier, vol. 37(5), pages 1437-1450.
    3. João F. Caldeira & Guilherme V. Moura & Francisco J. Nogales & André A. P. Santos, 2017. "Combining Multivariate Volatility Forecasts: An Economic-Based Approach," Journal of Financial Econometrics, Oxford University Press, vol. 15(2), pages 247-285.
    4. Pesaran, M. Hashem & Schleicher, Christoph & Zaffaroni, Paolo, 2009. "Model averaging in risk management with an application to futures markets," Journal of Empirical Finance, Elsevier, vol. 16(2), pages 280-305, March.
    5. Hugh Christensen & Simon Godsill & Richard E Turner, 2020. "Hidden Markov Models Applied To Intraday Momentum Trading With Side Information," Papers 2006.08307, arXiv.org.
    6. Morana, Claudio & Sbrana, Giacomo, 2019. "Climate change implications for the catastrophe bonds market: An empirical analysis," Economic Modelling, Elsevier, vol. 81(C), pages 274-294.
    7. Santos, André Alves Portela & Ferreira, Alexandre R., 2017. "On the choice of covariance specifications for portfolio selection problems," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 37(1), May.

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