Volatility timing and portfolio selection: How best to forecast volatility

Adam Clements and Annastiina Silvennoinen

No 76, NCER Working Paper Series from National Centre for Econometric Research

Abstract: Within the context of volatility timing and portfolio selection this paper considers how best to estimate a volatility model. Two issues are dealt with, namely the frequency of data used to construct volatility estimates, and the loss function used to estimate the parameters of a volatility model. We find support for the use of intraday data for estimating volatility which is consistent with earlier research. We also find that the choice of loss function is important and show that a simple mean squared error loss, overall provides the best forecasts of volatility upon which to form optimal portfolios.

Keywords: Volatility; volatility timing; utility; portfolio allocation; realized volatility (search for similar items in EconPapers)
JEL-codes: C22 G11 G17 (search for similar items in EconPapers)
Pages: 14 pages
Date: 2011-10-12
New Economics Papers: this item is included in nep-ecm, nep-for and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:qut:auncer:2011_7

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