Forecasting the density of asset returns

Trino Ñíguez Grau and Javier Perote

STICERD - Econometrics Paper Series from Suntory and Toyota International Centres for Economics and Related Disciplines, LSE

Abstract: In this paper we introduce a transformation of the Edgeworth-Sargan series expansion of the Gaussian distribution, that we call Positive Edgeworth-Sargan (PES). The main advantage of this new density is that it is well defined for all values in the parameter space, as well as it integrates up to one. We include an illustrative empirical application to compare its performance with other distributions, including the Gaussian and the Student's t, to forecast the full density of daily exchange-rate returns by using graphical procedures. Our results show that the proposed function outperforms the other two models for density forecasting, then providing more reliable value-at-risk forecasts.

Keywords: Density forecasting; Edgeworth-Sargan distribution; probability integral transformations; P-value plots; VaR (search for similar items in EconPapers)
JEL-codes: C16 C53 G12 (search for similar items in EconPapers)
Date: 2004-10
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Forecasting the density of asset returns (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:cep:stiecm:479

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