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Forecasting implied volatility indices worldwide: A new approach

Degiannakis, Stavros and Filis, George and Hassani, Hossein (2015): Forecasting implied volatility indices worldwide: A new approach.

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Abstract

This study provides a new approach for implied volatility indices forecasting. We assess whether non-parametric techniques provide better predictions of implied volatility compared to standard forecasting models, such as AFRIMA and HAR. A combination of Singular Spectrum Analysis (SSA) and Holt-Winters (HW) model is applied on eight implied volatility indices for the period from February, 2001 to July, 2013. The findings confirm that the SSA-HW provides statistically superior one trading day and ten trading days ahead implied volatility forecasts world widely. Model-averaged forecasts suggest that the forecasting accuracy is further enhanced, for the ten-days ahead, when the SSA-HW is combined with an ARI(1,1) model. Additionally, the trading game reveals that the SSA-HW and the ARI-SSA-HW are able to generate significant average positive net daily returns in the out-of-sample period. The results are important for option pricing, portfolio management, value-at-risk and economic policy.

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