High-frequency enhanced VaR: A robust univariate realized volatility model for diverse portfolios and market conditions

by Wei Kuang

In the field of financial risk management, the accuracy of portfolio Value-at-Risk (VaR) forecasts is of critical importance to both practitioners and academics. This study pioneers a comprehensive evaluation of a univariate model that leverages high-frequency intraday data to improve portfolio VaR forecasts, providing a novel contrast to both univariate and multivariate models based on daily data. Existing research has used such high-frequency-based univariate models for index portfolios, it has not adequately studied their robustness for portfolios with diverse risk profiles, particularly under changing market conditions, such as during crises. Our research fills this gap by proposing a refined univariate long-memory realized volatility model that incorporates realized variance and covariance metrics, eliminating the necessity for a parametric covariance matrix. This model captures the long-run dependencies inherent in the volatility process and provides a flexible alternative that can be paired with appropriate return innovation distributions for VaR estimation. Empirical analyses show that our methodology significantly outperforms traditional univariate and multivariate Generalized AutoRegressive Conditional Heteroskedasticity (GARCH) models in terms of forecasting accuracy while maintaining computational simplicity and ease of implementation. In particular, the inclusion of high-frequency data in univariate volatility models not only improves forecasting accuracy but also streamlines the complexity of portfolio risk assessment. This research extends the discourse between academic research and financial practice, highlighting the transformative impact of high-frequency data on risk management strategies within the financial sector.