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Forecasting global stock market implied volatility indices

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  • Degiannakis, Stavros
  • Filis, George
  • Hassani, Hossein

Abstract

This study compares parametric and non-parametric techniques in terms of their forecasting power on implied volatility indices. We extend our comparisons using combined and model-averaging models. The forecasting models are applied on eight implied volatility indices of the most important stock market indices. We provide evidence that the non-parametric models of Singular Spectrum Analysis combined with Holt-Winters (SSA-HW) exhibit statistically superior predictive ability for the one and ten trading days ahead forecasting horizon. By contrast, the model-averaged forecasts based on both parametric (Autoregressive Integrated model) and non-parametric models (SSA-HW) are able to provide improved forecasts, particularly for the ten trading days ahead forecasting horizon. For robustness purposes, we build two trading strategies based on the aforementioned forecasts, which further confirm that the SSA-HW and the ARI-SSA-HW are able to generate significantly higher net daily returns in the out-of-sample period.

Suggested Citation

  • Degiannakis, Stavros & Filis, George & Hassani, Hossein, 2018. "Forecasting global stock market implied volatility indices," Journal of Empirical Finance, Elsevier, vol. 46(C), pages 111-129.
  • Handle: RePEc:eee:empfin:v:46:y:2018:i:c:p:111-129
    DOI: 10.1016/j.jempfin.2017.12.008
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    Cited by:

    1. repec:eee:phsmap:v:511:y:2018:i:c:p:316-323 is not listed on IDEAS
    2. Degiannakis, Stavros & Filis, George, 2019. "Oil price volatility forecasts: What do investors need to know?," MPRA Paper 94445, University Library of Munich, Germany.

    More about this item

    Keywords

    Stock market; Implied volatility; Volatility forecasting; Singular Spectrum Analysis; ARFIMA; HAR; Holt-Winters; Model Confidence Set; Model-averaged forecasts;

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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