Forecasting Changes in Copper Futures Volatility with GARCH Models Using an Iterated Algorithm

Kenneth L Smith and Kevin Bracker

Review of Quantitative Finance and Accounting, 2003, vol. 20, issue 3, 245-65

Abstract: There is a gap in the literature regarding the out-of-sample forecasting ability of GARCH-type models applied to derivatives. A practitioner-oriented method (iterated cumulative sum of squares) is applied to detecting breakpoints in the variance of two copper futures series. Short-, intermediate-, and long-term out-of-sample forecasts of copper future series are compared to forecasts from a benchmark random walk model for each series. Not only do the GARCH-type models dominate the random walk model, but the relative improvement is fairly consistent across series, forecast horizon, and GARCH-type model. The evidence makes clear that, with few exceptions, the forecast improvement of the GARCH-type models over the RW model lies somewhere between 20-30 percent. It is particularly true that for the long-term close to close forecasts, there is great coherence among the forecasts. These all fall within a fairly narrow range. Copyright 2003 by Kluwer Academic Publishers

Date: 2003
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