A1026
Title: Realized stochastic volatility model with skew-t distributions for improved volatility and quantile forecasting
Authors: Makoto Takahashi - Hosei University (Japan) [presenting]
Yuta Yamauchi - Nagoya University (Japan)
Toshiaki Watanabe - Hitotsubashi University (Japan)
Yasuhiro Omori - University of Tokyo (Japan)
Abstract: Forecasting volatility and quantiles of financial returns is essential for accurately measuring financial tail risks, such as value-at-risk and expected shortfall. The critical elements in these forecasts involve understanding the distribution of financial returns and accurately estimating volatility. The purpose is to introduce an advancement to the traditional stochastic volatility model, termed the realized stochastic volatility model, which integrates realized volatility as a precise estimator of volatility. To capture the well-known characteristics of return distribution, namely skewness and heavy tails, we incorporate three types of skew-t distributions. Among these, two distributions include the skew-normal feature, offering enhanced flexibility in modeling the return distribution. A Bayesian estimation approach is employed using the Markov chain Monte Carlo method, which is applied to major stock indices. The empirical analysis, utilizing data from US and Japanese stock indices, indicates that the inclusion of both skewness and heavy tails in daily returns significantly improves the accuracy of volatility and quantile forecasts.
