How Relevant is Volatility Forecasting for Financial Risk Management? / Peter F. Christoffersen, Francis X. Diebold.

Format:

Book

Author/Creator:

Christoffersen, Peter F.

Contributor:

National Bureau of Economic Research.

Diebold, Francis X.

Series:

Working Paper Series (National Bureau of Economic Research) no. w6844.

NBER working paper series no. w6844

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1998.

Summary:

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.

Notes:

Print version record

December 1998.