Semi-parametric financial risk forecasting incorporating multiple realized measures (preprint)

A semi-parametric joint Value-at-Risk (VaR) and Expected Shortfall (ES) forecasting framework employing multiple realized measures is developed. The proposed framework extends the quantile regression using multiple realized measures as exogenous variables to model the VaR. Then, the information from realized measures is used to model the time-varying relationship between VaR and ES. Finally, a measurement equation that models the contemporaneous dependence between the quantile and realized measures is used to complete the model. A quasi-likelihood, built on the asymmetric Laplace distribution, enables the Bayesian inference for the proposed model. An adaptive Markov Chain Monte Carlo method is used for the model estimation. The empirical section evaluates the performance of the proposed framework with six stock markets from January 2000 to June 2022, covering the period of COVID-19. Three realized measures, including 5-minute realized variance, bi-power variation, and realized kernel, are incorporated and evaluated in the proposed framework. One-step ahead VaR and ES forecasting results of the proposed model are compared to a range of parametric and semi-parametric models, lending support to the effectiveness of the proposed framework.

Deep Learning Enhanced Realized GARCH (preprint)

We propose a new approach to volatility modeling by combining deep learning (LSTM) and realized volatility measures. This LSTM-enhanced realized GARCH framework incorporates and distills modeling advances from financial econometrics, high frequency trading data and deep learning. Bayesian inference via the Sequential Monte Carlo method is employed for statistical inference and forecasting. The new framework can jointly model the returns and realized volatility measures, has an excellent in-sample fit and superior predictive performance compared to several benchmark models, while being able to adapt well to the stylized facts in volatility. The performance of the new framework is tested using a wide range of metrics, from marginal likelihood, volatility forecasting, to tail risk forecasting and option pricing. We report on a comprehensive empirical study using 31 widely traded stock indices over a time period that includes COVID-19 pandemic.