Quantile forecasts using the Realized GARCH-EVT approach

Samit Paul and Prateek Sharma

Studies in Economics and Finance, 2018, vol. 35, issue 4, 481-504

Abstract: Purpose - This study aims to implement a novel approach of using the Realized generalized autoregressive conditional heteroskedasticity (GARCH) model within the conditional extreme value theory (EVT) framework to generate quantile forecasts. The Realized GARCH-EVT models are estimated with different realized volatility measures. The forecasting ability of the Realized GARCH-EVT models is compared with that of the standard GARCH-EVT models. Design/methodology/approach - One-step-ahead forecasts of Value-at-Risk (VaR) and expected shortfall (ES) for five European stock indices, using different two-stage GARCH-EVT models, are generated. The forecasting ability of the standard GARCH-EVT model and the asymmetric exponential GARCH (EGARCH)-EVT model is compared with that of the Realized GARCH-EVT model. Additionally, five realized volatility measures are used to test whether the choice of realized volatility measure affects the forecasting performance of the Realized GARCH-EVT model. Findings - In terms of the out-of-sample comparisons, the Realized GARCH-EVT models generally outperform the standard GARCH-EVT and EGARCH-EVT models. However, the choice of the realized estimator does not affect the forecasting ability of the Realized GARCH-EVT model. Originality/value - It is one of the earliest implementations of the two-stage Realized GARCH-EVT model for generating quantile forecasts. To the best of the authors’ knowledge, this is the first study that compares the performance of different realized estimators within Realized GARCH-EVT framework. In the context of high-frequency data-based forecasting studies, a sample period of around 11 years is reasonably large. More importantly, the data set has a cross-sectional dimension with multiple European stock indices, whereas most of the earlier studies are based on the US market.

Keywords: Value-at-Risk; Expected shortfall; Extreme value theory; Realized GARCH; Realized kernel; Skewed student-t (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eme:sefpps:sef-09-2016-0236

DOI: 10.1108/SEF-09-2016-0236

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