The Term Structure of Volatility Predictability
37 Pages Posted: 4 Apr 2019
Date Written: March 13, 2019
Volatility forecasting is crucial for portfolio management, risk management, and pricing of derivative securities. Still, little is known about the accuracy of volatility forecasts and the horizon of volatility predictability. This paper aims to fill these gaps in the literature. We begin this paper by introducing the notions of the spot and forward predicted volatilities and propose to describe the term structure of volatility predictability by the spot and forward forecast accuracy curves. Then we perform a comprehensive study on the term structure of volatility predictability in the stock and foreign exchange markets. Our results quantify the volatility forecast accuracy across horizons in the two major markets and suggest that the horizon of volatility predictability is significantly longer than that reported in the earlier studies. Nevertheless, the horizon of volatility predictability is found to be much shorter than the longest maturity of traded derivative contracts.
Keywords: spot volatility, forward volatility, volatility forecasting, high-frequency data, forecast accuracy, term structure, out-of-sample forecasting, model comparison, meta-analysis
JEL Classification: C22, C53, C58, G17
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