A Practical Guide to Forecasting Financial Market Volatility [Hardcover]

Financial market volatility forecasting is one of today's most important areas of expertise for professionals and academics in investment, option pricing, and financial market regulation. While many books address financial market modelling, no single book is devoted primarily to the exploration of volatility forecasting and the practical use of forecasting models. A Practical Guide to Forecasting Financial Market Volatility provides practical guidance on this vital topic through an in-depth examination of a range of popular forecasting models. Details are provided on proven techniques for building volatility models, with guide-lines for actually using them in forecasting applications.

Foreword by Clive Granger xiii

Preface xv

1 Volatility Definition and Estimation 1

1.1 What is volatility? 1

1.2 Financial market stylized facts 3

1.3 Volatility estimation 10

1.3.1 Using squared return as a proxy for daily volatility 11

1.3.2 Using the high–low measure to proxy volatility 12

1.3.3 Realized volatility, quadratic variation and jumps 14

1.3.4 Scaling and actual volatility 16

1.4 The treatment of large numbers 17

2 Volatility Forecast Evaluation 21

2.1 The form of Xt 21

2.2 Error statistics and the form of εt 23

2.3 Comparing forecast errors of different models 24

2.3.1 Diebold and Mariano’s asymptotic test 26

2.3.2 Diebold and Mariano’s sign test 27

2.3.3 Diebold and Mariano’sWilcoxon sign-rank test 27

2.3.4 Serially correlated loss differentials 28

2.4 Regression-based forecast efficiency and orthogonlC=