What Good is a Volatility Model?

29 Pages Posted: 7 Nov 2008

See all articles by Robert F. Engle

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)

Andrew J. Patton

Duke University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: January 2001

Abstract

A volatility model must be able to forecast volatility; this is the central requirement in almost all financial applications. In this paper we outline some stylised facts aboutvolatility that should be incorporated in a model; pronounced persistence and meanreversion, asymmetry such that the sign of an innovation also affects volatility and the possibility of exogenous or pre-determined variables influencing volatility. We use data on the Dow Jones Industrial index to illustrate these stylised facts, and the ability of GARCH-type models to capture these features. We conclude with some challenges for future research in this area.

Keywords: volatility modelling, ARCH, GARCH, volatility forecasting

Suggested Citation

Engle, Robert F. and Patton, Andrew J., What Good is a Volatility Model? (January 2001). NYU Working Paper No. S-DRP-01-03. Available at SSRN: https://ssrn.com/abstract=1296430

Robert F. Engle (Contact Author)

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

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New York University (NYU) - Department of Finance

Stern School of Business
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Andrew J. Patton

Duke University - Department of Economics ( email )

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