Time-varying tail behavior for realized kernels

Anne Opschoor and Andre Lucas
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Anne Opschoor: Vrije Universiteit Amsterdam

No 19-051/IV, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: We propose a new score-driven model to capture the time-varying volatility and tail behavior of realized kernels. We assume realized kernels follow an F distribution with two time-varying degrees-of-freedom parameters, accounting for the Vol-of-Vol and the tail shape of the realized kernel distribution. The resulting score-driven dynamics imply that the influence of large (outlying) realized kernels on future volatilities and tail-shapes is mitigated. We apply our model to 30 stocks from the S&P 500 index over the period 2001-2014. The results show that tail shapes vary over time, even after correcting for the time-varying mean and Vol-of-Vol of the realized kernels. The model outperforms a number of recent competitors, both in-sample and out-of-sample. In particular, accounting for time-varying tail shapes matters for both density forecasts and forecasts of volatility risk quantiles.

Keywords: realized kernel; heavy tails; F distribution; time-varying shape-parameter; Vol-of-Vol; score-driven dynamics (search for similar items in EconPapers)
JEL-codes: C32 C58 (search for similar items in EconPapers)
Date: 2019-07-31
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20190051

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