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

(2003). However, no forecast comparison is undertaken in Becker, Clements
and White (2006) and they merely conjecture that the VIX may be viewed as
a combination of MBF.

This paper seeks to examine this contention in more detail, specifically ex-
amining the forecast performance of SVP 500 IV, relative to a range of MBF
and combination forecasts based on both classes (IV and MBF). In doing
so, this paper addresses two outstanding issues raised by Poon and Granger
(2003). Poon and Granger (2003) highlight the fact that little attention has
been paid to the performance of combination forecasts, which are potentially
useful as different forecasting approaches capture different volatility dynamics.
They also point out that little has been done to consider whether forecasting
approaches are significantly different in terms of performance. By applying the
model confidence set approach proposed by Hansen, Lunde and Nason (2003),
this paper will determine whether combination volatility forecasts are statisti-
cally superior to individual models based and implied volatility forecasts. In
doing so, this paper also readdresses the relative performance of IV forecasts.

The paper will proceed as follows. Section 2 will outline the data relevant
to this study. Section 3 discusses the econometric models used to generate the
various forecasts, along with the methods used to discriminate between forecast
performance. Sections 4 and 5 present the empirical results and concluding
remarks respectively.

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