ALTERNATIVE MODELS TO EXTRACT ASSET VOLATILITY: A COMPARATIVE STUDY

Abstract

This paper presents an empirical comparison of the estimation of the volatility of three Brazilian financial series: a Brazilian Brady bond (the Cbond), a stock (Telebrás PN) and the Brazilian Real/US Dollar exchange rate, using different modelling methods. The models used are: XARCH family, Stochastic Volatility (SV) and the switching in the variance model (SWARCH). The comparison is done using three criteria: loss functions, which compare the square of the estimated volatility with the instantaneous volatility, a procedure proposed by Herencia et alii (1998) which used prediction confidence intervals and one-stepahead prediction, and a prediction exercise for the last 100 observations. In general the SV model presented the best performance although it is dominated by other models in some criteria.