Realized term structure of risk

Bruno Feunou* (Université de Montréal, CREST), Nour Meddahi (Imperial College London)

Abstract:

We model jointly the daily return and realized variance of financial asset as a bivariate affine model. The affine approach allows us to derive analytically the conditional distribution of future aggregate returns at any horizon, the term structures of the VaR and the expected shortfall. We empirically show the relevance of using the realized variance data by comparing the results with those implied by a daily GARCH model of Heston and Nandi (2000). We also show that our model outperforms the model introduced in Forsberg and Bollerslev (2002).