Forecasting Financial Market Volatility: A Review
43 Pages Posted: 15 Jun 2001
Date Written: June 11, 2001
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 72 papers published and written in the last decade. 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, the confounding effect of extreme values (e.g. the 1987 stock market crash) 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.
Keywords: Volatility, ARCH, Option Implied, High Frequency Data, Forecast Evaluation.
JEL Classification: A10, C10, C50, G10
Suggested Citation: Suggested Citation