Forecasting day-ahead expected shortfall on the EUR/USD exchange rate: The (I)relevance of implied volatility

Result code in IS VaVaI

<a href="https://www.isvavai.cz/riv?ss=detail&h=RIV%2F00216224%3A14560%2F24%3A00139422" target="_blank" >RIV/00216224:14560/24:00139422 - isvavai.cz</a>

Result on the web

<a href="https://www.sciencedirect.com/science/article/pii/S0169207023001115" target="_blank" >https://www.sciencedirect.com/science/article/pii/S0169207023001115</a>

DOI - Digital Object Identifier

<a href="http://dx.doi.org/10.1016/j.ijforecast.2023.11.003" target="_blank" >10.1016/j.ijforecast.2023.11.003</a>

Result language

angličtina

Original language name

Forecasting day-ahead expected shortfall on the EUR/USD exchange rate: The (I)relevance of implied volatility

Original language description

The existing literature provides mixed results on the usefulness of implied volatility for managing risky assets, while evidence for expected shortfall predictions is almost nonexistent. Given its forward-looking nature, implied volatility might be more valuable than backward-looking measures of realized price fluctuations. Conversely, the volatility risk premium embedded in implied volatility leads to overestimating the observed price variation. This paper explores the benefits of augmenting econometric models used in forecasting the expected shortfall, a risk measured endorsed in the Basel III Accord, with information on implied volatility obtained from EUR/USD option contracts. The day-ahead forecasts are obtained from several classes of econometric models: historical simulation, EGARCH, quantile regression-based HAR, joint VaR and ES model, and combination forecasts. We verify whether the resulting expected shortfall forecasts are well-specified and test the models’ accuracy. Our results provide evidence that the information provided by forward-looking implied volatility is more valuable than that in backward-looking realized measures. These results hold across multiple model specifications, are stable over time, hold under alternative loss functions, and are more pronounced during periods of higher market uncertainty when risk modeling matters most.

Czech name

—

Czech description

—

Type

J_imp - Article in a specialist periodical, which is included in the Web of Science database

CEP classification

—

OECD FORD branch

50206 - Finance

Project

<a href="/en/project/GA22-27075S" target="_blank" >GA22-27075S: Forecasting Market Risk: The Role of Trading Activity, Attention and Sentiment</a><br>

Continuities

P - Projekt vyzkumu a vyvoje financovany z verejnych zdroju (s odkazem do CEP)

Publication year

2024

Confidentiality

S - Úplné a pravdivé údaje o projektu nepodléhají ochraně podle zvláštních právních předpisů

Name of the periodical

International Journal of Forecasting

ISSN

0169-2070

e-ISSN

1872-8200

Volume of the periodical

40

Issue of the periodical within the volume

4

Country of publishing house

NL - THE KINGDOM OF THE NETHERLANDS

Number of pages

27

Pages from-to

1275-1301

UT code for WoS article

001307795600001

EID of the result in the Scopus database

2-s2.0-85182455353