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Econometrics Paper
Forecasting the density of asset returns
Trino-Manuel Niguez and Javier Perote
October 2004
Paper No' EM/2004/479:
Full Paper (pdf)

JEL Classification: C16; C53; G12

Tags: density forecasting; edgeworth-sargan distribution; probability integral transformations; p-value plots; var

In this paper we introduce a transformation of the Edgeworth-Sargan series expansion of the Gaussian distribution, that we call Positive Edgeworth-Sargan (PES). The main advantage of this new density is that it is well defined for all values in the parameter space, as well as it integrates up to one. We include an illustrative empirical application to compare its performance with other distributions, including the Gaussian and the Student’s t, to forecast the full density of daily exchange-rate returns by using graphical procedures. Our results show that the proposed function outperforms the other two models for density forecasting, then providing more reliable value-at-risk forecasts.