A Utility Based Comparison of Some Models of Exchange Rate Volatility

West, Kenneth D.; Edison, Hali J.; Cho, Dongchul

doi:10.3386/t0128

Cited by 118 publications

(160 citation statements)

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“…4 For example, the utility of realised returns on a portfolio formed using a volatility forecast, or the profits obtained from an option trading strategy based on a volatility forecast, see West et al (1993) and Engle et al (1993) for example, define economically meaningful loss functions, even though the optimal forecasts under those loss functions will not generally be the true conditional variance.…”

Section: Notationmentioning

confidence: 99%

Volatility forecast comparison using imperfect volatility proxies

Patton

2011

Journal of Econometrics

919

391

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a b s t r a c tThe 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.

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Section: Notationmentioning

confidence: 99%

Volatility forecast comparison using imperfect volatility proxies

Patton

2011

Journal of Econometrics

919

391

View full text Add to dashboard Cite

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“…We apply the methodology suggested by West et al (1993) and Fleming et al ( , 2003 to quantify the economic benefit of different correlation forecasts in the context of a portfolio strategy based on volatility timing. Similarly to Engle and Colacito (2006) and Bandi et al (2008), we employ the variance component of an investor's long-run mean-variance utility as a metric to quantify the economic differences between the alternative correlation (covariance) forecasts:…”

Section: Resultsmentioning

confidence: 99%

A General Multivariate Threshold GARCH Model with Dynamic Conditional Correlations

Trojani

Audrino

2007

SSRN Journal

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We introduce a new multivariate GARCH model with multivariate thresholds in conditional correlations and develop a two-step estimation procedure that is feasible in large dimensional applications. Optimal threshold functions are estimated endogenously from the data, and the model conditional covariance matrix is ensured to be positive definite. We study the empirical performance of our model in two applications using US stock and bond market data. The conditional volatility of stock returns exhibits GARCH and threshold structures, but the conditional correlation dynamics depend on piecewise constant thresholds only. We estimate both threshold and GARCH structures in the conditional correlations of stock and government bond returns. In both applications our model has, in terms of statistical and economic significance, higher forecasting power than several other multivariate GARCH models for conditional correlations.

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“…This is counterintuitive because, for instance, an investor with increasing RRA becomes more averse to a percentage loss in wealth when his wealth increases. As in West, Edison, and Cho (1993) and Fleming, Kirby, and Ostdiek (2001), …xing the degree of RRA, , implies that expected utility is linearly homogeneous in wealth: double wealth and expected utility doubles. Furthermore, by …xing instead of , we are implicitly interpreting quadratic utility as an approximation to a nonquadratic utility function, with the approximating choice of dependent on wealth.…”

Section: Quadratic Utilitymentioning

confidence: 99%

“…In this case, West, Edison, and Cho (1993) demonstrate that one can use the average realized utility, U ( ), to consistently estimate the expected utility generated by a given level of initial wealth. Speci…cally, the average utility for an investor with initial wealth W 0 is equal to…”

Section: Quadratic Utilitymentioning

confidence: 99%

The expectation hypothesis of the term structure of very short-term rates: Statistical tests and economic value☆

Corte

Sarno

Thornton

2008

Journal of Financial Economics

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This paper reexamines the validity of the expectation hypothesis (EH) of the term structure of US repo rates ranging in maturity from overnight to three months. We extend the work of Longstaff (2000b) in two directions: (1) we implement statistical tests designed to increase test power in this context; (2) more important, we assess the economic value of departures from the EH based on criteria of profitability and economic significance in the context of a simple trading strategy. The EH is rejected throughout the term structure examined on the basis of the statistical tests. However, the results of our economic analysis are favorable to the EH, suggesting that the statistical rejections of the EH in the repo market are economically insignificant.

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A Utility Based Comparison of Some Models of Exchange Rate Volatility

Cited by 118 publications

References 0 publications

Volatility forecast comparison using imperfect volatility proxies

Volatility forecast comparison using imperfect volatility proxies

A General Multivariate Threshold GARCH Model with Dynamic Conditional Correlations

The expectation hypothesis of the term structure of very short-term rates: Statistical tests and economic value☆

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