Are combination forecasts of S&P 500 volatility statistically superior?



Are combination forecasts of SAP 500 volatility
statistically superior?

Ralf Becker* and Adam E. Clements#

* Economics, School of Social Sciences, University of Manchester
# School of Economics and Finance, Queensland University of Technology

May 17, 2007

Abstract

Forecasting volatility has received a great deal of research attention.
Many articles have considered the relative performance of econometric
model based and option implied volatility forecasts. While many studies
have found that implied volatility is the preferred approach, a number of is-
sues remain unresolved. One issue being the relative merit of combination
forecasts. By utilising recent econometric advances, this paper considers
whether combination forecasts of SAP 500 volatility are statistically supe-
rior to a wide range of model based forecasts and implied volatility. It is
found that combination forecasts are the dominant approach, indicating
that the VIX cannot simply be viewed as a combination of various model
based forecasts.

Keywords: Implied volatility, volatility forecasts, volatility models, realized
volatility, combination forecasts.

JEL Classification: C12, C22, G00.

Acknowledgements

Corresponding author

Adam Clements

School of Economics and Finance

Queensland University of Technology

GPO Box 2434, Brisbane Q, Australia 4001

email [email protected]

Ph +61 7 3864 2525, Fax +61 7 3864 1500.



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