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J. Risk Financial Manag. 2014, 7(2), 80-109; doi:10.3390/jrfm7020080

Asymmetric Realized Volatility Risk

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Received: 4 April 2014 / Revised: 23 May 2014 / Accepted: 23 June 2014 / Published: 25 June 2014
Download PDF [579 KB, uploaded 25 June 2014]
Abstract: In this paper, we document that realized variation measures constructed from high-frequency returns reveal a large degree of volatility risk in stock and index returns, where we characterize volatility risk by the extent to which forecasting errors in realized volatility are substantive. Even though returns standardized by ex post quadratic variation measures are nearly Gaussian, this unpredictability brings considerably more uncertainty to the empirically relevant ex ante distribution of returns. Explicitly modeling this volatility risk is fundamental. We propose a dually asymmetric realized volatility model, which incorporates the fact that realized volatility series are systematically more volatile in high volatility periods. Returns in this framework display time varying volatility, skewness and kurtosis. We provide a detailed account of the empirical advantages of the model using data on the S&P 500 index and eight other indexes and stocks.
Keywords: realized volatility; volatility of volatility; volatility risk; value-at-risk; forecasting; conditional heteroskedasticity realized volatility; volatility of volatility; volatility risk; value-at-risk; forecasting; conditional heteroskedasticity
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

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MDPI and ACS Style

Allen, D.E.; McAleer, M.; Scharth, M. Asymmetric Realized Volatility Risk. J. Risk Financial Manag. 2014, 7, 80-109.

AMA Style

Allen DE, McAleer M, Scharth M. Asymmetric Realized Volatility Risk. Journal of Risk and Financial Management. 2014; 7(2):80-109.

Chicago/Turabian Style

Allen, David E.; McAleer, Michael; Scharth, Marcel. 2014. "Asymmetric Realized Volatility Risk." J. Risk Financial Manag. 7, no. 2: 80-109.

J. Risk Financial Manag. EISSN 1911-8074 Published by MDPI AG, Basel, Switzerland RSS E-Mail Table of Contents Alert