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Alternative Volatility Models for Risk Management and Trading: An Application to the EUR/USD and USD/JPY Rates
Company: Liverpool John Moores University
Company Url: Click here to open
Year Of Publication: 2004
Month Of Publication: September
Pages: 36
Download Count: 16
View Count: 1891
Comment Num: 0
Language: English
Who Can Read: Free
Date: 4-2-2010
Publisher: Administrator
Summary
In this paper, we examine the forecasting ability of several alternative models
of currency volatility applied to two foreign exchange rates: EUR/USD and
USD/JPY which, according to the BIS (2004), represent 45% of the $1.9
trillion daily trading volume on the world currency markets. Benchmarked
against two na?ve ‘random walk’ models and a RiskMetrics volatility model,
the predictive ability of the AR(p), GARCH(p,q), new modelling approaches
such as Stochastic Variance (SV) and Neural Network Regression (NNR)
models, and two different model combinations is assessed at the 1-, 5- and
21-day horizons not only in terms of traditional forecasting accuracy measures
but also in terms of risk management efficiency under the Value-at-Risk (VaR)
framework and trading performance with a volatility filter strategy.
These daily models are developed over the period from 2nd January 1998 to
13th May 2002 (1116 observations), and tested out-of-sample from 14th May
2002 to 28th March 20
Author(s)
Dunis, C_hristian L. Sign in to follow this author
Chen, Yao Xian Sign in to follow this author
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