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.

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
>
> 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
>
> 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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