EVALUATING DENSITY FORECASTS WITH APPLICATIONS TO FINANCIAL RISK MANAGEMENT

Density forecasting is increasingly more important and commonplace, fo r example in financial risk management, yet little attention has been given to the evaluation of density forecasts. We develop a simple and operational framework for density forecast evaluation. We illustrate t he framework with a detailed application to density forecasting of ass et returns in environments with time-varying volatility. Finally, we d iscuss several extensions.