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J. Risk Financial Manag. 2016, 9(3), 10; doi:10.3390/jrfm9030010

On Setting Day-Ahead Equity Trading Risk Limits: VaR Prediction at Market Close or Open?

1
Faculty of Finance, Cass Business School, City University London, 106 Bunhill Row, London EC1Y 8TZ, UK
2
University of Southampton, Highfield Campus, Southampton SO17 1BJ, UK
*
Author to whom correspondence should be addressed.
Academic Editors: Stefan Mittnik and Marc S. Paolella
Received: 4 July 2016 / Revised: 9 August 2016 / Accepted: 23 August 2016 / Published: 9 September 2016
(This article belongs to the Special Issue Advances in Modeling Value at Risk and Expected Shortfall)
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Abstract

This paper investigates the information content of the ex post overnight return for one-day-ahead equity Value-at-Risk (VaR) forecasting. To do so, we deploy a univariate VaR modeling approach that constructs the forecast at market open and, accordingly, exploits the available overnight close-to-open price variation. The benchmark is the bivariate VaR modeling approach proposed by Ahoniemi et al. that constructs the forecast at the market close instead and, accordingly, it models separately the daytime and overnight return processes and their covariance. For a small cap portfolio, the bivariate VaR approach affords superior predictive ability than the ex post overnight VaR approach whereas for a large cap portfolio the results are reversed. The contrast indicates that price discovery at the market open is less efficient for small capitalization, thinly traded stocks. View Full-Text
Keywords: overnight information; price discovery; realized VaR; realized volatility; Value-at-Risk overnight information; price discovery; realized VaR; realized volatility; Value-at-Risk
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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. (CC BY 4.0).

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MDPI and ACS Style

Fuertes, A.-M.; Olmo, J. On Setting Day-Ahead Equity Trading Risk Limits: VaR Prediction at Market Close or Open? J. Risk Financial Manag. 2016, 9, 10.

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