The Term Structure of Volatility Predictability

37 Pages Posted: 4 Apr 2019

See all articles by Xingyi Li

Xingyi Li

School of Business and Law, University of Agder

Valeriy Zakamulin

University of Agder - School of Business and Law

Date Written: March 13, 2019

Abstract

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

Suggested Citation

Li, Xingyi and Zakamulin, Valeriy, The Term Structure of Volatility Predictability (March 13, 2019). Available at SSRN: https://ssrn.com/abstract=3350362 or http://dx.doi.org/10.2139/ssrn.3350362

Xingyi Li

School of Business and Law, University of Agder ( email )

Serviceboks 422
N-4604 Kristiansand, VEST AGDER 4604
Norway
38141338 (Phone)

Valeriy Zakamulin (Contact Author)

University of Agder - School of Business and Law ( email )

Service Box 422
Kristiansand, N-4604
Norway
+47 38141039 (Phone)

HOME PAGE: http://vzakamulin.weebly.com/

Register to save articles to
your library

Register

Paper statistics

Downloads
124
Abstract Views
472
rank
227,556
PlumX Metrics