Forecasting Volatility in Financial Markets: A Review (revised edition)

80 Pages Posted: 4 Dec 2002  

Clive W. J. Granger

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

Ser-Huang Poon

University of Manchester - Manchester Business School

Multiple version iconThere are 2 versions of this paper

Date Written: September 18, 2002

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 93 papers published and written in the last two decades. 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, and the confounding effect of extreme values 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 Volatility in Financial Markets: A Review (revised edition) (September 18, 2002). Available at SSRN: https://ssrn.com/abstract=331800 or http://dx.doi.org/10.2139/ssrn.331800

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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