Comparison of Realized Measure and Implied Volatility in Forecasting Volatility
Article first published online: 7 JUN 2013
Copyright © 2013 John Wiley & Sons, Ltd.
Journal of Forecasting
Volume 32, Issue 6, pages 522–533, September 2013
How to Cite
Han, H. and Park, M. D. (2013), Comparison of Realized Measure and Implied Volatility in Forecasting Volatility. J. Forecast., 32: 522–533. doi: 10.1002/for.2253
- Issue published online: 26 JUL 2013
- Article first published online: 7 JUN 2013
- Manuscript Accepted: 15 AUG 2012
- Manuscript Revised: 11 JUL 2012
- Manuscript Received: 9 JUL 2011
- volatility forecast;
- realized kernel;
- HEAVY models
This paper compares the information content of realized measures constructed from high-frequency data and implied volatilities from options in the context of forecasting volatility. The comparison is based on within-sample and out-of-sample (over horizons of 1–22 days) forecasts of daily S&P 500 index return volatility. The paper adds to the findings of previous studies, by considering recent developments in the related practice and the literature. It is shown that, for within-sample fitting, the realized measure is more informative than the implied volatility. In contrast, the implied volatility is more informative than the realized measure for out-of-sample forecasting, in particular for multi-step-ahead forecasting. Moreover, we show that it is helpful to use all the information provided by the realized measure and the implied volatility for the within-sample fitting. For multi-step-ahead forecasting, however, it is better to use only the implied volatility. Copyright © 2013 John Wiley & Sons, Ltd.