The term structure of volatility predictability

Xingyi Li and Valeriy Zakamulin

International Journal of Forecasting, 2020, vol. 36, issue 2, 723-737

Abstract: Volatility forecasting is crucial for portfolio management, risk management, and pricing of derivative securities. Still, little is known about the accuracy of volatility forecasts and the horizon of volatility predictability. This paper aims to fill these gaps in the literature. We begin this paper by introducing the notions of spot and forward predicted volatilities and propose describing the term structure of volatility predictability by spot and forward forecast accuracy curves. Then, we perform a comprehensive study of the term structure of volatility predictability in stock and foreign exchange markets. Our results quantify the volatility forecast accuracy across horizons in two major markets and suggest that the horizon of volatility predictability is significantly longer than that reported in earlier studies. Nevertheless, the aforesaid horizon is observed to be much shorter than the longest maturity of traded derivative contracts.

Keywords: Spot volatility; Forward volatility; Volatility forecasting; High-frequency data; Forecast accuracy; Term structure; Out-of-sample forecasting; Model comparison (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfor:v:36:y:2020:i:2:p:723-737

DOI: 10.1016/j.ijforecast.2019.08.010

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