Optimal probabilistic forecasts for risk management

03/03/2023
by   Yuru Sun, et al.
0

This paper explores the implications of producing forecast distributions that are optimized according to scoring rules that are relevant to financial risk management. We assess the predictive performance of optimal forecasts from potentially misspecified models for i) value-at-risk and expected shortfall predictions; and ii) prediction of the VIX volatility index for use in hedging strategies involving VIX futures. Our empirical results show that calibrating the predictive distribution using a score that rewards the accurate prediction of extreme returns improves the VaR and ES predictions. Tail-focused predictive distributions are also shown to yield better outcomes in hedging strategies using VIX futures.

READ FULL TEXT

Please sign up or login with your details

Forgot password? Click here to reset