Forecasting Volatility in Financial Markets: A Review (revised edition)
Clive W. J. Granger
University of California, San Diego (UCSD) - Department of Economics; Tinbergen Institute
Manchester Business School, University of Manchester
September 18, 2002
Financial market volatility is an important input for investment, option pricing and financial market regulation. In this review article, we compare the volatility forecasting findings in 93 papers published and written in the last two decades. This article is written for general readers in Economics, and its emphasis is on forecasting instead of modelling. We separate the literature into two main streams; the first consists of research papers that formulate volatility forecasts based on historical price information only, while the second includes research papers that make use of volatility implied in option prices.
Provided in this paper as well are volatility definitions, insights into problematic issues of forecast evaluation, the effect of data frequency on volatility forecast accuracy, measurement of "actual" volatility, and the confounding effect of extreme values on volatility forecasting performance. We compare volatility forecasting results across different asset classes, and markets in different geographical regions. Suggestions are made for future research.
Number of Pages in PDF File: 80
Keywords: Volatility, ARCH, Option Implied, High Frequency Data, Forecast Evaluation
JEL Classification: A10, C10, C50, G10working papers series
Date posted: December 4, 2002
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