On Setting Day-Ahead Equity Trading Risk Limits: VaR Prediction at Market Close or OpenReport as inadecuate


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


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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





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Academic Editors: Stefan Mittnik and Marc S. Paolella

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





Author: Ana-Maria Fuertes 1,†,* and Jose Olmo 2

Source: http://mdpi.com/



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