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Realized volatility risk

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Allen, David E. and McAleer, Michael and Scharth, Marcel (2013) Realized volatility risk. [ Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE); nº 26, 2013, ] (Unpublished)

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Official URL: http://eprints.ucm.es/22385/


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Abstract

In this paper we document that realized variation measures constructed from high-frequency returns reveal a large degree of volatility risk in stock and index returns, where we characterize volatility risk by the extent to which forecasting errors in realized volatility are substantive. Even though returns standardized by ex post quadratic variation measures are nearly gaussian, this unpredictability brings considerably more uncertainty to the empirically relevant ex ante distribution of returns. Explicitly modeling this volatility risk is fundamental.
We propose a dually asymmetric realized volatility model, which incorporates the fact that realized volatility series are systematically more volatile in high volatility periods. Returns in this framework display time varying volatility, skewness and kurtosis. We provide a detailed account of the empirical advantages of the model using data on the S&P 500 index and eight other indexes and stocks.


Item Type:Working Paper or Technical Report
Additional Information:

Acknowledgements: the authors wish to acknowledge the insightful comments and suggestions of Marcelo Medeiros.
The nancial support of the Australian Research Council is gratefully acknowledged. Michael McAleer wishes to
acknowledge the nancial support of the National Science Council, Taiwan. Data supplied by Securities Industry
Research Centre of Asia-Paci c (SIRCA).

Uncontrolled Keywords:Realized volatility, Volatility of volatility, Volatility risk, Value-at-risk, forecasting, Conditional heteroskedasticity
Subjects:Social sciences > Economics > Econometrics
Series Name:Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE)
Volume:2013
Number:26
ID Code:22385
Deposited On:15 Jul 2013 10:52
Last Modified:09 Jan 2014 11:45

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