Re: [R] [R-SIG-Finance] EMM: how to make forecast using EMM methods?

From: Michael <comtech.usa_at_gmail.com>
Date: Thu, 28 Feb 2008 17:46:23 -0800

Hi Guy,

Thanks for your help! Yes, we have the coefficient estimated using EMM. And we followed those papers.

Just want to check my understanding about your suggestion:

Do you mean that after we obtain the estimated coefficients,

we run one simulation to obtain the whole sequence of latent variable (the volatility time series, from time 0 to time t+1),

where time t is today, and t+1 is tomorrow(one step forecast);

And that's one simulation.

And we run such simulation for N times, let's say N=10000,

and obtain 10000 such volatility time series, each ending at time t+1,

and then we take average of the 10000 data points at t+1,

the average will be the mean-forecast of the volatility tomorrow(i.e. that's the one step forecast that we want)...

Am I right in doing these procedures?

Thanks

On Thu, Feb 28, 2008 at 4:30 PM, Guy Yollin <guy.yollin_at_rotellacapital.com> wrote:
> Michael,
>
> If I understand correctly, you've used some EMM algorithms to estimate

> the parameters of a stochastic volatility model.
>

> If this is the case you should now be able to use Monte Carlo methods to
> generate forecasts from your model.
>
> That is, you will generate random variables (according to the
> specifications of your model), feed them into your model and hence
> simulate your stochastic volatility process.
>
> Note sure what references you have been using but perhaps these would be
> helpful:
>
> Gallant, Hsieh and Tauchen (1997). "Estimation of stochastic volatility

> models with diagnostics", Journal of Econometrics, 81, 159-192.
>

> Andersen, T.G. H.-J. Chung, and B.E. Sorensen (1999). "Efficient Method
> of Moments Estimation of a Stochastic Volatility Model: A Monte Carlo
> Study," Journal of Econometrics, 91, 61-87.
>
> Best,
>
> -- G
>
>
>
>
> -----Original Message-----
> From: r-sig-finance-bounces_at_stat.math.ethz.ch
>
> [mailto:r-sig-finance-bounces_at_stat.math.ethz.ch] On Behalf Of Michael
> Sent: Thursday, February 28, 2008 12:56 PM
> To: r-sig-finance_at_stat.math.ethz.ch; r-help
>
>
> Subject: [R-SIG-Finance] EMM: how to make forecast using EMM methods?
>
> Hi all,
>
> We followed some books and sample codes and did some EMM estimation,
> only to find it won't be able to generate forecast.
>
> This is because in the stochastic volatility models we are estimating,
> the volatilities are latent variables, and we want to forecast 1-step
> ahead or h-step ahead volatilities.
>
> So it is nice to have the system estimated, but we couldn't get it to
> forecast at all.
>
> There is a "Reprojection" Method described in the original EMM paper,
> but let's say we reproject to a GARCH(1,1) model, then only the
> GARCH(1, 1) parameters are significant, which basically means we
> degrade the SV model into a GARCH model. There is no way to do the
> forecast...
>
> Could anybody give some pointers?
>
> Thanks!
>
>
>
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