Observation-driven models for realized variances and overnight returns applied to Value-at-Risk and Expected Shortfall forecasting

Anne Opschoor*, André Lucas

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

We present a new model to decompose total daily return volatility into high-frequency-based open-to-close volatility and a time-varying scaling factor. We use score-driven dynamics based on fat-tailed distributions to obtain robust volatility dynamics. Applying our new model to a 2001–2018 sample of individual stocks and stock indices, we find substantial in-sample variation of the daytime-to-total volatility ratio over time. We apply the model to out-of-sample forecasting, evaluated in terms of Value-at-Risk and Expected Shortfall. Models with a non-constant volatility ratio typically perform best, particularly in terms of Value-at-Risk. Our new model performs especially well during turbulent times. All results are generally stronger for individual stocks than for index returns.

Original languageEnglish
JournalInternational Journal of Forecasting
DOIs
Publication statusAccepted/In press - 1 Jan 2020

Keywords

  • Expected Shortfall
  • F distribution
  • Overnight volatility
  • Realized variance
  • Score-driven dynamics
  • Value-at-Risk

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