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http://ssrn.com/abstract=1502915
 
 

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A Practical Guide to Volatility Forecasting through Calm and Storm


Christian T. Brownlees


Universitat Pompeu Fabra - Department of Economics and Business; Barcelona Graduate School of Economics (Barcelona GSE)

Robert F. Engle


New York University - Leonard N. Stern School of Business - Department of Economics; New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Bryan T. Kelly


University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

August 1, 2011


Abstract:     
We present a volatility forecasting comparative study within the ARCH class of models. Our goal is to identify successful predictive models over multiple horizons and to investigate how predictive ability is influenced by choices for estimation window length, innovation distribution, and frequency of parameter re-estimation. Test assets include a range of domestic and international equity indices and exchange rates. We find that model rankings are insensitive to forecast horizon and suggestions for estimation best practices emerge. While our main sample spans 1990-2008, we take advantage of the near-record surge in volatility during the last half of 2008 to ask if forecasting models or best practices break down during periods of turmoil. Surprisingly, we find that volatility during the 2008 crisis was well approximated by predictions one-day ahead, and should have been within risk managers' 1% confidence intervals up to one month ahead.

Number of Pages in PDF File: 23

Keywords: Volatility, ARCH, Forecasting, Forecast Evaluation

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Date posted: November 10, 2009 ; Last revised: November 15, 2013

Suggested Citation

Brownlees, Christian T. and Engle, Robert F. and Kelly, Bryan T., A Practical Guide to Volatility Forecasting through Calm and Storm (August 1, 2011). Available at SSRN: http://ssrn.com/abstract=1502915 or http://dx.doi.org/10.2139/ssrn.1502915

Contact Information

Christian T. Brownlees (Contact Author)
Universitat Pompeu Fabra - Department of Economics and Business ( email )
Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
HOME PAGE: http://www.econ.upf.edu/~cbrownlees/
Barcelona Graduate School of Economics (Barcelona GSE) ( email )
Ramon Trias Fargas 25-27
Barcelona, Catalonia 08014
Spain
Robert F. Engle
New York University - Leonard N. Stern School of Business - Department of Economics ( email )
269 Mercer Street
New York, NY 10003
United States
New York University (NYU) - Department of Finance
Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Bryan T. Kelly
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-8359 (Phone)
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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