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Forecasting European Equity Risk over Different Horizons
Mar 1, 2006
European equity risk levels have undergone extreme variations since the late 1990s, and have shown several distinct behavioural shifts over the past two decades. In this changeful environment, near-term (several-month) and long-term (annual) realised risk often differ markedly. Investors with different investment horizons consequently have different risk-forecasting needs. Near-term investors require risk forecasts that respond aggressively to recent events. Long-term investors are likely to prefer forecasts that, while responsive, react more cautiously to very recent -- and often short-lived -- events. This report introduces EUE2S and EUE2L, two new risk models that together comprise the Multiple-Horizon European Equity Model. They have been constructed to meet the needs of near-term and long-term investors. Both versions apply daily returns data to their forecasts. Daily data provide denser volatility information than monthly returns, and allow the new models to forecast risk more responsively than EUE2, the model they replace.
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