Forecasting Intraday Volatility and Value-at-Risk with High-Frequency Data

Abstract

In this paper, we develop modeling tools to forecast Value-at-Risk and volatility with investment horizons of less than one day. We quantify the market risk based on the study at a 30-min time horizon using modified GARCH models. The evaluation of intraday market risk can be useful to market participants (day traders and market makers) involved in frequent trading. As expected, the volatility features a significant intraday seasonality, which motivates us to include the intraday seasonal indexes in the GARCH models. We also incorporate realized variance (RV) and time-varying degrees of freedom in the GARCH models to capture more intraday information on the volatile market. The intrinsic tail risk index is introduced to assist with understanding the inherent risk level in each trading time interval. The proposed models are evaluated based on their forecasting performance of one-period-ahead volatility and Intraday Value-at-Risk (IVaR) with application to the 30 constituent stocks. We find that models with seasonal indexes generally outperform those without; RV can improve the out-of-sample forecasts of IVaR; student GARCH models with time-varying degrees of freedom perform best at 0.5 and 1 % IVaR, while normal GARCH models excel for 2.5 and 5 % IVaR. The results show that RV and seasonal indexes are useful to forecasting intraday volatility and Intraday VaR.

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Correspondence to Mike K. P. So.

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So, M.K.P., Xu, R. Forecasting Intraday Volatility and Value-at-Risk with High-Frequency Data. Asia-Pac Financ Markets 20, 83–111 (2013). https://doi.org/10.1007/s10690-012-9160-1

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Keywords

  • GARCH
  • Intraday market risk
  • Intrinsic tail risk index
  • Realized volatility
  • Risk management
  • Seasonality
  • Value at Risk