Asymmetric Realized Volatility Risk


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Allen, David E. and McAleer, Michael and Scharth, Marcel (2014) Asymmetric Realized Volatility Risk. [ Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE); nº 16, 2014, ISSN: 2341-2356 ] (Unpublished)

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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 inpredictability 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:

JEL Classification: C58, G12

Uncontrolled Keywords:Realized volatility, Volatility of volatility, Volatility risk, Value-at-risk, Forecasting, Conditional heteroskedasticity.
Subjects:Social sciences > Economics > Econometrics
JEL:C58, G12
Series Name:Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE)
ID Code:26053
Deposited On:30 Jun 2014 11:00
Last Modified:02 Feb 2016 13:48

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