An International Comparison of Implied, Realized and GARCH Volatility Forecasts
Journal of Futures Markets, Forthcoming
98 Pages Posted: 26 Mar 2016 Last revised: 20 Apr 2016
Date Written: March 24, 2016
We compare the predictive ability and economic value of implied, realized and GARCH volatility models for 13 equity indices from 10 countries. Model ranking is similar across countries, but varies with the forecast horizon. At the daily horizon, the Heterogeneous Autoregressive model offers the most accurate predictions while an implied volatility model that corrects for the volatility risk premium is superior at the monthly horizon. Widely used GARCH models have inferior performance in almost all cases considered. All methods perform significantly worse over the 2008-09 crisis period. Finally, implied volatility offers significant improvements against historical methods for international portfolio diversification.
Keywords: Implied Volatility, Realized Volatility, Volatility Risk Premium, Financial Crisis, International Diversification
JEL Classification: G15; G17; G01; G11
Suggested Citation: Suggested Citation