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Tail risk forecasting of realized volatility CAViaR models

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  • Chen, Cathy W.S.
  • Hsu, Hsiao-Yun
  • Watanabe, Toshiaki

Abstract

This research proposes a new class of RES-CAViaR (conditional autoregressive value-at-risk) models, that incorporate daily realized volatility and expected shortfall (ES) to forecast VaR and ES simultaneously. We further consider weekly and monthly realized volatilities in the proposed model to approximate a long-memory process. We employ the Bayesian adaptive Markov chain Monte Carlo approach to estimate all unknown parameters and to jointly predict daily VaR and ES over a 4-year out-of-sample period including the COVID-19 pandemic. Our results show that the realized CAViaR-type models outperform in terms of three backtests, four loss-function criteria, and ES measurement at the 1% level.

Suggested Citation

  • Chen, Cathy W.S. & Hsu, Hsiao-Yun & Watanabe, Toshiaki, 2023. "Tail risk forecasting of realized volatility CAViaR models," Finance Research Letters, Elsevier, vol. 51(C).
    • Handle: RePEc:eee:finlet:v:51:y:2023:i:c:s1544612322005050
    DOI: 10.1016/j.frl.2022.103326
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