How Relevant is Volatility Forecasting for Financial Risk Management?

Peter Christoffersen and Francis Diebold

No 6844, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: It depends. If volatility fluctuates in a forecastable way, then volatility forecasts are useful for risk management; hence the interest in volatility forecastability in the risk management literature. Volatility forecastability, however, varies with horizon, and different horizons are relevant in different applications. Moreover, existing assessments of volatility forecastability are plagued by the fact that they are joint assessments of volatility forecastability and an assumed model, and the results vary not only with the horizon, but also with the assumed model. To address this problem, we develop a model-free procedure for assessing volatility forecastability across horizons. Perhaps surprisingly, we find that volatility forecastability decays quickly with horizon. Volatility forecastability, although clearly of relevance for risk management at the short horizons relevant for, say, trading desk management, may not be important for risk management more generally.

JEL-codes: C5 G1 (search for similar items in EconPapers)
Date: 1998-12
New Economics Papers: this item is included in nep-cfn, nep-ecm and nep-ifn
Note: AP
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Citations: View citations in EconPapers (6)

Published as Review of Economics and Statistics, Vol. 82 (2000): 12-23.

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Related works:
Journal Article: How Relevant is Volatility Forecasting for Financial Risk Management? (2000)
Working Paper: How Relevant is Volatility Forecasting for Financial Risk Management? (1998)
Working Paper: How Relevant is Volatility Forecasting for Financial Risk Management? (1997)
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