Equilibrium-based volatility models of the market portfolio rate of return (peacock tails or stotting gazelles)

David Feldman () and Xin Xu ()
Additional contact information
David Feldman: The University of New South Wales (UNSW)
Xin Xu: Fair Isaac (FICO)

Annals of Operations Research, 2018, vol. 262, issue 2, No 12, 493-518

Abstract: Abstract We introduce a theoretical and empirical method of studying equilibrium-consistent volatility models. We implement it with the market portfolio’s return, which is central to financial risk management. Within an equilibrium framework, we study two families of such models. One is deterministic volatility, represented by current popular models. The other is in the “constant elasticity of variance” family, in which we propose new models. Theoretically, we show that, together with constant expected returns, the latter family tends to have better ability to forecast. Empirically, our proposed models, while as easy to implement as the popular ones, outperform them in three out-of-sample forecast evaluations of different time periods, by standard predictability criteria. This is true particularly during high-volatility periods, whether the market rises or falls.

Keywords: Market risk; Volatility model; Systematic risk; Market portfolio; Predictive power; Equilibrium; GARCH; RiskMetrics; Piecewise constant volatility; Constant elasticity of variance (search for similar items in EconPapers)
JEL-codes: C58 G12 G17 (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)

Downloads: (external link)
http://link.springer.com/10.1007/s10479-015-1972-8 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
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:spr:annopr:v:262:y:2018:i:2:d:10.1007_s10479-015-1972-8

Ordering information: This journal article can be ordered from
http://www.springer.com/journal/10479

DOI: 10.1007/s10479-015-1972-8

Access Statistics for this article

Annals of Operations Research is currently edited by Endre Boros

More articles in Annals of Operations Research from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().