Article by: Stephen Figlewski
Published by: New York University Stern School of Business
Date: 24 Apr 2004
“This monograph puts together results from several lines of research that I have pursued over a period of years, on the general topic of volatility forecasting for option pricing applications. It is not meant to be a complete survey of the extensive literature on the subject, nor is it a definitive set of prescriptions on how to get the best volatility forecast. While at the outset, I had hoped to find the Best Method to obtain a volatility input for use in pricing options, as the reader will quickly determine, it seems that I have been more successful in uncovering the flaws and difficulties in the methods that are widely used than I have been in determining a single optimal strategy myself.
“Since I am not revealing the optimal approach to volatility forecasting, the major value of this work, if any, is more to share with the reader a variety of observations and thoughts about volatility prediction, that I have arrived at after investigating the problem from a number of different angles. Two major themes emerge, both having to do with the connection, or perhaps more correctly, the possibility of a disconnection between theory and practice in dealing with volatility prediction and its role in option valuation. Two general classes of theories are involved.”
Full article (PDF): Link