2021/06/01 by Chao Wang, Wang, Chao, Richard Gerlach +1
Economics, Econometrics and Finance · #FOS: Economics and business #Financial Risk and Volatility Modeling #Monetary Policy and Economic Impact #Risk Management (q-fin.RM) #Stochastic processes and financial applications #q-fin.RM
paper · pdf · doi:10.48550/arxiv.2106.00288
28 pages, 6 Tables, 4 Figures
openalex publication_date 2021/06/01 · openalex created_date 2021/06/22 · arxiv created 2022/10/30 · arxiv updated 2022/11/01 · openalex updated_date 2026/07/28
This paper proposes an innovative threshold measurement equation to be employed in a Realized-GARCH framework. The proposed framework incorporates a nonlinear threshold regression specification to consider the leverage effect and model the contemporaneous dependence between the observed realized measure and hidden volatility. A Bayesian Markov Chain Monte Carlo method is adapted and employed for model estimation, with its validity assessed via a simulation study. The validity of incorporating the proposed measurement equation in Realized-GARCH type models is evaluated via an empirical study, forecasting the 1% and 2.5% Value-at-Risk and Expected Shortfall on six market indices with two different out-of-sample sizes. The proposed framework is shown to be capable of producing competitive tail risk forecasting results in comparison to the GARCH and Realized-GARCH type models.