Volatility forecast comparison using imperfect volatility proxies

Published

Journal Article

The use of a conditionally unbiased, but imperfect, volatility proxy can lead to undesirable outcomes in standard methods for comparing conditional variance forecasts. We motivate our study with analytical results on the distortions caused by some widely used loss functions, when used with standard volatility proxies such as squared returns, the intra-daily range or realised volatility. We then derive necessary and sufficient conditions on the functional form of the loss function for the ranking of competing volatility forecasts to be robust to the presence of noise in the volatility proxy, and derive some useful special cases of this class of "robust" loss functions. The methods are illustrated with an application to the volatility of returns on IBM over the period 1993 to 2003. © 2010 Elsevier B.V. All rights reserved.

Full Text

Duke Authors

Cited Authors

  • Patton, AJ

Published Date

  • January 1, 2011

Published In

Volume / Issue

  • 160 / 1

Start / End Page

  • 246 - 256

International Standard Serial Number (ISSN)

  • 0304-4076

Digital Object Identifier (DOI)

  • 10.1016/j.jeconom.2010.03.034

Citation Source

  • Scopus