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Modeling and Forecasting Volatility – How Reliable are modern day approaches?

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  • Mehta, Anirudh
  • Kanishka, Kunal

Abstract

This study explores the volatility models and evaluates the quality of one-step ahead forecasts of volatility constructed by (1) GARCH, (2) TGARCH, (3) Risk metrics and (4) Historical volatility. Volatility forecasts suggest that TGARCH performs relatively best in term of MSPE, followed by GARCH, Risk metrics and historical volatility. In terms of VaR, we test for correct unconditional coverage and index- Dependence of violations using Likelihood Ratio tests. The tests suggest that VaR forecasts at 90 % and 95% have desirable properties. Regarding 99% VaR forecasts, We find significant evidence that suggests none of the models can reliably predict at this confidence level.

Suggested Citation

  • Mehta, Anirudh & Kanishka, Kunal, 2014. "Modeling and Forecasting Volatility – How Reliable are modern day approaches?," MPRA Paper 59788, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:59788
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    References listed on IDEAS

    as
    1. Christoffersen, Peter F, 1998. "Evaluating Interval Forecasts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 841-862, November.
    2. Parkinson, Michael, 1980. "The Extreme Value Method for Estimating the Variance of the Rate of Return," The Journal of Business, University of Chicago Press, vol. 53(1), pages 61-65, January.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Asset pricing; Volatility Forecasting; GARCH; T-GARCH; Risk metrics; LR ratio; VaR;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C19 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Other
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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