Volatility Forecasting: The Role of Internet Search Activity and Implied Volatility

49 Pages Posted: 21 Jul 2016 Last revised: 4 Aug 2018

See all articles by Arabinda Basistha

Arabinda Basistha

West Virginia University - College of Business & Economics

Alexander Kurov

West Virginia University - College of Business & Economics

Marketa Wolfe

Skidmore College - Department of Economics

Date Written: July 30, 2018

Abstract

Recent empirical literature shows that Internet search activity is closely associated with volatility in financial and commodity markets. We evaluate the role of the Internet search activity in forecasting realized volatility using benchmark models that include market-based variables. We conduct not only in-sample but also recursive, window-size robust out-of-sample analysis. In both in-sample and out-of-sample models, the predictive power of the Internet search activity data disappears in the financial markets and substantially diminishes in the commodity markets once implied volatility is included. A common component analysis shows that most of the predictive information contained in the Internet search activity is also present in implied volatility while implied volatility has additional predictive information that is not contained in the Internet search activity.

Keywords: Volatility forecasting, realized volatility, implied volatility, Internet search activity, Google Trends search volume index, information

JEL Classification: C32, C52, G12, G14, G17

Suggested Citation

Basistha, Arabinda and Kurov, Alexander and Wolfe, Marketa, Volatility Forecasting: The Role of Internet Search Activity and Implied Volatility (July 30, 2018). Available at SSRN: https://ssrn.com/abstract=2812387 or http://dx.doi.org/10.2139/ssrn.2812387

Arabinda Basistha

West Virginia University - College of Business & Economics ( email )

Morgantown, WV 26506-6025
United States

Alexander Kurov (Contact Author)

West Virginia University - College of Business & Economics ( email )

P.O. Box 6025
Morgantown, WV 26506
United States

Marketa Wolfe

Skidmore College - Department of Economics ( email )

815 N Broadway
Saratoga Springs, NY 12866
United States
+1-518-580-8374 (Phone)

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