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

[Michael]

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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