VIX Forecast Under Different Volatility Specifications

Ying Wang () and Hoi Ying Wong ()
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Ying Wang: The Chinese University of Hong Kong
Hoi Ying Wong: The Chinese University of Hong Kong

Asia-Pacific Financial Markets, 2017, vol. 24, issue 2, No 3, 148 pages

Abstract: Abstract Stochastic volatility (SV) models are theoretically more attractive than the GARCH type of models as it allows additional randomness. The classical SV models deduce a continuous probability distribution for volatility so that it does not admit a computable likelihood function. The estimation requires the use of Bayesian approach. A recent approach considers discrete stochastic autoregressive volatility models for a bounded and tractable likelihood function. Hence, a maximum likelihood estimation can be achieved. This paper proposes a general approach to link SV models under the physical probability measure, both continuous and discrete types, to their processes under a martingale measure. Doing so enables us to deduce the close-form expression for the VIX forecast for the both SV models and GARCH type models. We then carry out an empirical study to compare the performances of the continuous and discrete SV models using GARCH models as benchmark models.

Keywords: Stochastic volatility; GARCH; DSARV; Continuous SV; VIX; Forecast (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1007/s10690-017-9227-0

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