Realized Stochastic Volatility Models with Skew-t Distributions for Volatility and Tail Risk Forecasting

Makoto Takahashi, Yuta Yamauchi, Toshiaki Watanabe and Yasuhiro Omori

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Abstract: Volatility forecasts underlie tail risk measures: value-at-risk (VaR) and expected shortfall (ES). This paper compares realized stochastic volatility (RSV) models, which add a realized measure to the stochastic volatility (SV) model, with their SV counterparts under normal, Student's t, two skew-normal, and three skew-t return distributions, and against EGARCH and REGARCH benchmarks. Estimated by Markov chain Monte Carlo on the Dow Jones Industrial Average and the Nikkei 225, the models are compared by their one-day-ahead volatility, VaR, and ES forecasts (the predictive mean for volatility). Adding realized volatility improves volatility forecasts over the main sample for both indices under every proxy and return distribution; the gains are uniformly significant for the Nikkei 225 but, for the Dow Jones, only under the realized variance used in estimation. During the COVID-19 period the gains persist for the Nikkei 225 but vanish for the Dow Jones, where the REGARCH benchmark is best. For VaR and ES the gains are confined to the Nikkei 225 and to the 5% level for the Dow Jones, and few matched-pair differences are significant. Skewed innovations lower the 1% joint loss for the Dow Jones, but no specification dominates across indices, risk levels, and sample periods.

Date: 2024-01, Revised 2026-10
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-fmk, nep-for and nep-rmg
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