EconPapers    
Economics at your fingertips  
 

Point process models for extreme returns: Harnessing implied volatility

Rodrigo Herrera () and Adam Clements

Journal of Banking & Finance, 2018, vol. 88, issue C, 161-175

Abstract: Forecasting the risk of extreme losses is an important issue in the management of financial risk. There has been a great deal of research examining how option implied volatilities (IV) can be used to forecast asset return volatility. However, the role of IV in the context of predicting extreme risk has received relatively little attention. The potential benefit of IV in forecasting extreme risk is considered within a range of models beginning with the traditional GARCH based approach, along with a number of novel point process models. Univariate models where IV is included as an exogenous variable are considered along with a novel bivariate approach where extreme movements in IV are treated as another point process. It is found that in the context of forecasting Value-at-Risk, the bivariate models produce the most accurate forecasts across a wide range of scenarios.

Keywords: Implied volatility; Hawkes process; Peaks over threshold; Point process; Extreme events (search for similar items in EconPapers)
JEL-codes: C32 C53 C58 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378426617302893
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Point process models for extreme returns: Harnessing implied volatility (2015) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:88:y:2018:i:c:p:161-175

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

 
Page updated 2018-11-12
Handle: RePEc:eee:jbfina:v:88:y:2018:i:c:p:161-175