Density Forecasting with Time Varying Higher Moments – A Model Confidence Set Approach

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Abstract

Density forecasts contain a complete description of the uncertainty associated with a point forecast and are therefore important measures of financial risk. This paper aims to examine if the new more complicated models for financial returns that allow for time variation in higher moments lead to better out-of-sample density forecasts. Using two decades of daily Standard and Poor's 500 index returns I find that a model with time varying conditional variance, skewness and kurtosis produces significantly better density forecasts than the competing models.

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Research areas and keywords

Subject classification (UKÄ) – MANDATORY

  • Economics
  • Business Administration

Keywords

  • model confidence set, density forecasting, GARCH
Original languageEnglish
Pages (from-to)19-31
JournalJournal of Forecasting
Volume32
Issue number1
Publication statusPublished - 2013
Publication categoryResearch
Peer-reviewedYes