nep-for New Economics Papers
on Forecasting
Issue of 2024‒02‒19
one paper chosen by
Rob J Hyndman, Monash University

  1. Realized Stochastic Volatility Model with Skew-t Distributions for Improved Volatility and Quantile Forecasting By Makoto Takahashi; Yuta Yamauchi; Toshiaki Watanabe; Yasuhiro Omori

  1. By: Makoto Takahashi; Yuta Yamauchi; Toshiaki Watanabe; Yasuhiro Omori
    Abstract: Forecasting volatility and quantiles of financial returns is essential for accurately measuring financial tail risks, such as value-at-risk and expected shortfall. The critical elements in these forecasts involve understanding the distribution of financial returns and accurately estimating volatility. This paper introduces an advancement to the traditional stochastic volatility model, termed the realized stochastic volatility model, which integrates realized volatility as a precise estimator of volatility. To capture the well-known characteristics of return distribution, namely skewness and heavy tails, we incorporate three types of skew-t distributions. Among these, two distributions include the skew-normal feature, offering enhanced flexibility in modeling the return distribution. We employ a Bayesian estimation approach using the Markov chain Monte Carlo method and apply it to major stock indices. Our empirical analysis, utilizing data from US and Japanese stock indices, indicates that the inclusion of both skewness and heavy tails in daily returns significantly improves the accuracy of volatility and quantile forecasts.
    Date: 2024–01

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