GARCH density and functional forecasts

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Title: GARCH density and functional forecasts
Authors: Abadir, K
Luati, A
Paruolo, P
Item Type: Journal Article
Abstract: This paper derives the analytic form of the multi-step ahead prediction density for single-period returns, when the latter follow a Gaussian GARCH(1,1) process with a possibly asymmetric news impact curve. The Gaussian density has been used in applications as an approximation of the multi-step ahead prediction density; the analytic form derived here shows that the prediction density, while symmetric, can be far from Gaussian. The explicit form of the prediction density can be used to compute exact tail probabilities and functionals, such as the Value at Risk and the Expected Shortfall, to quantify expected future required risk capital for single-period returns. Finally, the paper shows how estimation uncertainty can be mapped onto uncertainty regions for any functional of the stated prediction distribution.
Date of Acceptance: 19-Apr-2022
URI: http://hdl.handle.net/10044/1/97608
ISSN: 0304-4076
Publisher: Elsevier
Journal / Book Title: Journal of Econometrics
Copyright Statement: Subject to copyright. All rights reserved.
Keywords: 0104 Statistics
1402 Applied Economics
1403 Econometrics
Econometrics
Publication Status: Accepted
Embargo Date: Embargoed for 24 months after publication date
Appears in Collections:Imperial College Business School