Peter F. Christoffersen, Francis X. Diebold
ABSTRACT
It depends. If volatility fluctuates in a forecastable way,
then volatility forecasts are useful for risk management; hence the
interest in volatility forecastability in the risk management literature.
Volatility forecastability, however, varies with horizon, and different
horizons are relevant in different applications. Existing assessments are
plagued by the fact that they are joint assessments of volatility
forecastability and an assumed model, and the results vary not only with
the horizon, but also with the model. To address this problem, we develop
a model-free procedure for measuring volatility forecastability across
horizons. Perhaps surprisingly, we find that volatility forecastability
decays quickly with horizon. Volatility forecastability, although clearly
of relevance for risk management at the very short horizons relevant for,
say, trading desk management, may not be important for risk management
more generally.
Diebold: fdiebold@mail.sas.upenn.edu
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