On Setting Day-Ahead Equity Trading Risk Limits: VaR Prediction at Market Close or Open?
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-ope...
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doaj-c0c02a3cc54c421889fa3f4865714d602020-11-24T23:39:39ZengMDPI AGJournal of Risk and Financial Management1911-80742016-09-01931010.3390/jrfm9030010jrfm9030010On Setting Day-Ahead Equity Trading Risk Limits: VaR Prediction at Market Close or Open?Ana-Maria Fuertes0Jose Olmo1Faculty of Finance, Cass Business School, City University London, 106 Bunhill Row, London EC1Y 8TZ, UKUniversity of Southampton, Highfield Campus, Southampton SO17 1BJ, UKThis 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.http://www.mdpi.com/1911-8074/9/3/10overnight informationprice discoveryrealized VaRrealized volatilityValue-at-Risk |
collection |
DOAJ |
language |
English |
format |
Article |
sources |
DOAJ |
author |
Ana-Maria Fuertes Jose Olmo |
spellingShingle |
Ana-Maria Fuertes Jose Olmo On Setting Day-Ahead Equity Trading Risk Limits: VaR Prediction at Market Close or Open? Journal of Risk and Financial Management overnight information price discovery realized VaR realized volatility Value-at-Risk |
author_facet |
Ana-Maria Fuertes Jose Olmo |
author_sort |
Ana-Maria Fuertes |
title |
On Setting Day-Ahead Equity Trading Risk Limits: VaR Prediction at Market Close or Open? |
title_short |
On Setting Day-Ahead Equity Trading Risk Limits: VaR Prediction at Market Close or Open? |
title_full |
On Setting Day-Ahead Equity Trading Risk Limits: VaR Prediction at Market Close or Open? |
title_fullStr |
On Setting Day-Ahead Equity Trading Risk Limits: VaR Prediction at Market Close or Open? |
title_full_unstemmed |
On Setting Day-Ahead Equity Trading Risk Limits: VaR Prediction at Market Close or Open? |
title_sort |
on setting day-ahead equity trading risk limits: var prediction at market close or open? |
publisher |
MDPI AG |
series |
Journal of Risk and Financial Management |
issn |
1911-8074 |
publishDate |
2016-09-01 |
description |
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. |
topic |
overnight information price discovery realized VaR realized volatility Value-at-Risk |
url |
http://www.mdpi.com/1911-8074/9/3/10 |
work_keys_str_mv |
AT anamariafuertes onsettingdayaheadequitytradingrisklimitsvarpredictionatmarketcloseoropen AT joseolmo onsettingdayaheadequitytradingrisklimitsvarpredictionatmarketcloseoropen |
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1725512496946610176 |