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.