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

R.G. Donaldson and Mark Kamstra ()

Discussion Papers from Department of Economics, Simon Fraser University

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.

Keywords: TRADE; EXPECTATIONS; FORECASTS (search for similar items in EconPapers)
JEL-codes: G14 F47 F1 (search for similar items in EconPapers)
Date: 2001

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