Modeling and forecasting stock return volatility using the HARGARCH model with VIX information

Zhiyuan Pan, Jun Zhang, Yudong Wang and Juan Huang

Journal of Futures Markets, 2024, vol. 44, issue 8, 1383-1403

Abstract: This study develops a novel approach for improving stock return volatility forecasts using volatility index information with the entropic tilting technique. Unlike traditional linear heteroskedasticity autoregressive methods with option‐implied information, we first derive predictive densities from traditional models, and then tilt using both the first and second moments of the risk‐neutral distribution, which enables us to capture the nonlinear effect in our specification. The empirical findings demonstrate a substantial enhancement in the forecasting accuracy of all models once the first‐ and second‐moment information is considered, where the improvement is both statistically and economically significant. These results have important implications for risk management in well‐established derivatives markets.

Date: 2024
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