Modeling and forecasting the volatility of Brazilian asset returns

Marcelo Carvalho, MArco Aurelio Freire (msfreire@bkb.com.br), Marcelo Medeiros (marcelom@illinois.edu) and Leonardo Souza
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MArco Aurelio Freire: BANK BOSTON

No 530, Textos para discussão from Department of Economics PUC-Rio (Brazil)

Abstract: The goal of this paper is twofold. First, using five of the most actively traded stocks in the Brazilian financial market, this paper shows that the normality assumption commonly used in the risk management area to describe the distributions of returns standardized by volatilities is not compatible with volatilities estimated by EWMA or GARCH models. In sharp contrast, when the information contained in high frequency data is used to construct the realized volatility measures, we attain the normality of the standardized returns, giving promise of improvements in Value-at-Risk statistics. We also describe the distributions of volatilities of the Brazilian stocks, showing that they are nearly lognormal. Second, we estimate a simple model to the log of realized volatilities that differs from the ones in other studies. The main difference is that we do not find evidence of long memory. The estimated model is compared with commonly used alternatives in an out-of-sample forecasting experiment.

Pages: 26p
Date: 2006-11
New Economics Papers: this item is included in nep-ets, nep-for, nep-mst and nep-rmg
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Citations: View citations in EconPapers (7)

Published in Revista Brasileira de Finanças, Volume 4, p.321-343, 2006

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