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

54 Pages Posted: 21 Jul 2016 Last revised: 2 Jun 2019

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: May 31, 2019

Abstract

Recent empirical literature shows that Internet search activity is closely associated with volatility prediction in financial and commodity markets. In this study, we search for a benchmark model with available market-based predictors to evaluate the net contribution of the Internet search activity data in forecasting volatility. We conduct in-sample analysis and window-size robust out-of-sample forecasting analysis in multiple markets for robust model validation. The predictive power of the Internet search activity data disappears in the financial markets and substantially diminishes in the commodity markets once the model includes implied volatility. A further 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 data.

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 (May 31, 2019). 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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