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

30 Pages Posted: 9 Feb 2021

See all articles by Arabinda Basistha

Arabinda Basistha

West Virginia University - College of Business & Economics

Marketa Wolfe

Skidmore College - Department of Economics

Alexander Kurov

West Virginia University - College of Business & Economics

Multiple version iconThere are 2 versions of this paper

Date Written: November 8, 2018

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 internet search activity data in forecasting volatility. We conduct in-sample analysis and out-of-sample forecasting analysis robust to window size in multiple markets for robust model validation. The predictive power of 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 internet search activity data 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.

Suggested Citation

Basistha, Arabinda and Wolfe, Marketa and Kurov, Alexander, Volatility Forecasting: The Role of Internet Search Activity and Implied Volatility (November 8, 2018). Journal of Risk Model Validation, Vol. 14, No. 1, Available at SSRN: https://ssrn.com/abstract=3780274

Arabinda Basistha

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

Morgantown, WV 26506-6025
United States

Marketa Wolfe

Skidmore College - Department of Economics ( email )

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

Alexander Kurov (Contact Author)

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

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

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