Optimally harnessing inter-day and intra-day information for daily value-at-risk prediction

Fuertes, Ana-Maria and Olmo, Jose (2013) Optimally harnessing inter-day and intra-day information for daily value-at-risk prediction. International Journal of Forecasting, 29 (1), 28-42. (doi:10.1016/j.ijforecast.2012.05.005).

Record type: Article

Abstract

We make use of quantile regression theory to obtain a combination of individual potentially-biased VaR forecasts that is optimal because, by construction, it meets the correct out-of-sample conditional coverage criterion ex post. This enables a Wald-type conditional quantile forecast encompassing test to be used for any finite set of competing (semi/non)parametric models which can be nested. Two attractive properties of this backtesting approach are its robustness to both model risk and estimation uncertainty. We deploy the techniques to analyse inter-day and high frequency intra-day VaR models for equity, FOREX, fixed income and commodity trading desks. The forecast combination of both types of models is especially warranted for more extreme-tail risks. Overall, our empirical analysis supports the use of high frequency 5 minute price information for daily risk management.

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