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Forecasting S&P 500 Daily Volatility using a Proxy for Downward Price Pressure

29 Oct 2011

Article by: Marcel P. Visser
Published by: Korteweg-de Vries Instute for Mathematics, University of Amsterdam
Date: 14 Oct 2008

“This paper decomposes volatility proxies according to upward and downward price
movements in high-frequency financial data, and uses this decomposition for forecasting
volatility. The paper introduces a simple Garch-type discrete time model that incor-
porates such high-frequency based statistics into a forecast equation for daily volatil-
ity. Analysis of S&P 500 index tick data over the years 1988–2006 shows that taking
into account the downward movements improves forecast accuracy significantly. The
R2 statistic for evaluating daily volatility forecasts attains a value of 0.80, both for
in-sample and out-of-sample prediction.”

Full article (PDF): Link

 
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