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Volatility Forecasts, Trading Volume and the ARCH vs. Option-Implied Volatility Tradeoff

Author

Listed:
  • Donaldson, R.G.
  • Kamstra, M.

Abstract

Market expectations of future return volatility play a crucial role in finance; so too does our understanding of the process by which information is incorporated in security prices through the trading process. This paper seeks to learn something about both of these issues by investigating empirically the role of trading volume (a) in predicting the relative informativeness of volatility forecasts produced by ARCH models versus the volatility forecasts derived from option prices, and (b) in improving volatility forecasts produced by ARCH and option models and combinations of models.

Suggested Citation

  • Donaldson, R.G. & Kamstra, M., 2001. "Volatility Forecasts, Trading Volume and the ARCH vs. Option-Implied Volatility Tradeoff," Discussion Papers dp01-1, Department of Economics, Simon Fraser University.
    • Handle: RePEc:sfu:sfudps:dp01-1
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    Citations

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    Cited by:

    1. Gonzalez, Liliana & Powell, John G. & Shi, Jing & Wilson, Antony, 2005. "Two centuries of bull and bear market cycles," International Review of Economics & Finance, Elsevier, vol. 14(4), pages 469-486.
    2. Taylor, Nicholas, 2008. "Can idiosyncratic volatility help forecast stock market volatility?," International Journal of Forecasting, Elsevier, vol. 24(3), pages 462-479.

    More about this item

    Keywords

    TRADE ; EXPECTATIONS ; FORECASTS;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
    • F1 - International Economics - - Trade

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