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Quantile forecasts of daily exchange rate returns from forecasts of realized volatility

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Clements, Michael P., Galvão, Ana Beatriz and Kim, Jae H.. (2008) Quantile forecasts of daily exchange rate returns from forecasts of realized volatility. Journal of Empirical Finance, Vol.15 (No.4). pp. 729-750. ISSN 0927-5398

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Official URL: http://dx.doi.org/10.1016/j.jempfin.2007.12.001

Abstract

Quantile forecasts are central to risk management decisions because of the widespread use of Value-at-Risk. A quantile forecast is the product of two factors: the model used to forecast volatility, and the method of computing quantiles from the volatility forecasts. In this paper we calculate and evaluate quantile forecasts of the daily exchange rate returns of five currencies. The forecasting models that have been used in recent analyses of the predictability of daily realized volatility permit a comparison of the predictive power of different measures of intraday variation and intraday returns in forecasting exchange rate variability. The methods of computing quantile forecasts include making distributional assumptions for future daily returns as well as using the empirical distribution of predicted standardized returns with both rolling and recursive samples. Our main findings are that the Heterogenous Autoregressive model provides more accurate volatility and quantile forecasts for currencies which experience shifts in volatility, such as the Canadian dollar, and that the use of the empirical distribution to calculate quantiles can improve forecasts when there are shifts.

Item Type:	Journal Article
Subjects:	H Social Sciences > HF Commerce H Social Sciences > HB Economic Theory
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Foreign exchange rates, International finance, Time series analysis
Journal or Publication Title:	Journal of Empirical Finance
Publisher:	Elsevier
ISSN:	0927-5398
Date:	August 2008
Volume:	Vol.15
Number:	No.4
Page Range:	pp. 729-750
Identification Number:	10.1016/j.jempfin.2007.12.001
Status:	Peer Reviewed
Access rights to Published version:	Open Access
Description:	Version accepted by publisher (post-print, after peer review, before copy-editing).
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URI:	http://wrap.warwick.ac.uk/id/eprint/90