Forecasting Financial Market Volatility: A Review

43 Pages Posted: 15 Jun 2001

See all articles by Clive W. J. Granger

Clive W. J. Granger

University of California, San Diego (UCSD) - Department of Economics; Tinbergen Institute

Ser-Huang Poon

University of Manchester - Manchester Business School

Date Written: June 11, 2001

Abstract

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

Granger, Clive W. J. and Poon, Ser-Huang, Forecasting Financial Market Volatility: A Review (June 11, 2001). Available at SSRN: https://ssrn.com/abstract=268866 or http://dx.doi.org/10.2139/ssrn.268866

Clive W. J. Granger

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
858-534-3383 (Phone)
858-534-7040 (Fax)

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Ser-Huang Poon (Contact Author)

University of Manchester - Manchester Business School ( email )

Crawford House
Oxford Road
Manchester, Manchester M13 9PL
United Kingdom
+44 161 275 4031 (Phone)
+44 161 275 4023 (Fax)

HOME PAGE: http://www.manchester.ac.uk/research/Ser-huang.poon/

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