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Quantile Forecasts of Daily Exchange Rate Returns from Forecasts of Realized Volatility

Michael Clements, Ana Galvão () and Jae Kim ()

No 269747, Economic Research Papers from University of Warwick - Department of Economics

Abstract: Quantile forecasts are central to risk management decisions because of the widespread use of Value-at-Risk. A quantile forecast is the product of two factors: the model used to forecast volatility, and the method of computing quantiles from the volatility forecasts. In this paper we calculate and evaluate quantile forecasts of the daily exchange rate returns of Öve currencies. The forecasting models that have been used in recent analyses of the predictability of daily realized volatility permit a comparison of the predictive power of di§erent measures of intraday variation and intraday returns in forecasting exchange rate variability. The methods of computing quantile forecasts include making distributional assumptions for future daily returns as well as using the empirical distribution of predicted standardized returns with both rolling and recursive samples. Our main Öndings are that the HAR model provides more accurate volatility and quantile forecasts for currencies which experience shifts in volatility, such as the Canadian dollar, and that the use of the empirical distribution to calculate quantiles can improve forecasts when there are shifts.

Keywords: Financial Economics; International Relations/Trade (search for similar items in EconPapers)
Date: 2006-11-11
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Related works:
Journal Article: Quantile forecasts of daily exchange rate returns from forecasts of realized volatility (2008) Downloads
Working Paper: Quantile Forecasts of Daily Exchange Rate Returns from Forecasts of Realized Volatility (2006) Downloads
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