On the Economic Evaluation of Volatility Forecasts

Valeri Voev ()

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: We analyze the applicability of economic criteria for volatility forecast evaluation based on unconditional measures of portfolio performance. The main theoretical finding is that such unconditional measures generally fail to rank conditional forecasts correctly due to the presence of a bias term driven by the variability of the conditional mean and portfolio weights. Simulations and a small empirical study suggest that the bias can be empirically substantial and lead to distortions in forecast evaluation. An important implication is that forecasting superiority of models using high frequency data is likely to be understated if unconditional criteria are used.

Keywords: Forecast evaluation; Volatility forecasting; Portfolio optimization; Mean-variance analysis (search for similar items in EconPapers)
JEL-codes: C32 C53 G11 (search for similar items in EconPapers)
Pages: 22
Date: 2009-11-24
New Economics Papers: this item is included in nep-ecm, nep-for and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2009-56

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