Forecasting Value-at-Risk and Expected Shortfall using Fractionally Integrated Models of Conditional Volatility: International Evidence

Stavros Degiannakis, Christos Floros and Pamela Dent

MPRA Paper from University Library of Munich, Germany

Abstract: The present study compares the performance of the long memory FIGARCH model, with that of the short memory GARCH specification, in the forecasting of multi-period Value-at-Risk (VaR) and Expected Shortfall (ES) across 20 stock indices worldwide. The dataset is comprised of daily data covering the period from 1989 to 2009. The research addresses the question of whether or not accounting for long memory in the conditional variance specification improves the accuracy of the VaR and ES forecasts produced, particularly for longer time horizons. Accounting for fractional integration in the conditional variance model does not appear to improve the accuracy of the VaR forecasts for the 1-day-ahead, 10-day-ahead and 20-day-ahead forecasting horizons relative to the short memory GARCH specification. Additionally, the results suggest that underestimation of the true VaR figure becomes less prevalent as the forecasting horizon increases. Furthermore, the GARCH model has a lower quadratic loss between actual returns and ES forecasts, for the majority of the indices considered for the 10-day and 20-day forecasting horizons. Therefore, a long memory volatility model compared to a short memory GARCH model does not appear to improve the VaR and ES forecasting accuracy, even for longer forecasting horizons. Finally, the rolling-sampled estimated FIGARCH parameters change less smoothly over time compared to the GARCH models. Hence, the parameters' time-variant characteristic cannot be entirely due to the news information arrival process of the market; a portion must be due to the FIGARCH modelling process itself.

Keywords: Expected Shortfall; Long Memory; Multi-period Forecasting; Value-at-Risk; Volatility Forecasting. (search for similar items in EconPapers)
JEL-codes: C15 C32 C53 G15 G17 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

Published in International Review of Financial Analysis 27 (2013): pp. 21-33

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Journal Article: Forecasting value-at-risk and expected shortfall using fractionally integrated models of conditional volatility: International evidence (2013)
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