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The Economic Value of Volatility Forecasts: A Conditional Approach

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  • Nicholas Taylor

Abstract

We investigate the economic value of multivariate volatility forecasting ability using a testing framework that assesses the quality of competing methods from a conditional investment perspective. This approach provides a novel means of assessing the benefits of using a particular set of volatility forecasts. Applying the framework to U.S. bond and stock futures markets, we find that investors are willing to pay a significant premium for knowledge of the dynamics of volatility, though the magnitude of this premium varies over time and depends on risk preferences and economic conditions. The latter variation implies that selection of appropriate forecasting methods should be a conditional exercise.

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  • Nicholas Taylor, 2014. "The Economic Value of Volatility Forecasts: A Conditional Approach," Journal of Financial Econometrics, Oxford University Press, vol. 12(3), pages 433-478.
    • Handle: RePEc:oup:jfinec:v:12:y:2014:i:3:p:433-478.
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    File URL: http://hdl.handle.net/10.1093/jjfinec/nbt021
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    Cited by:

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    2. Nick Taylor, 2017. "Risk Control: Who Cares?," European Financial Management, European Financial Management Association, vol. 23(1), pages 153-179, January.
    3. Hamid, Alain & Heiden, Moritz, 2015. "Forecasting volatility with empirical similarity and Google Trends," Journal of Economic Behavior & Organization, Elsevier, vol. 117(C), pages 62-81.
    4. Hengzhen Lu & Qiujin Gao & Ling Xiao & Gurjeet Dhesi, 2024. "Forecasting EUA futures volatility with geopolitical risk: evidence from GARCH-MIDAS models," Review of Managerial Science, Springer, vol. 18(7), pages 1917-1943, July.
    5. Degiannakis, Stavros & Filis, George, 2022. "Oil price volatility forecasts: What do investors need to know?," Journal of International Money and Finance, Elsevier, vol. 123(C).
    6. Nick Taylor, 2023. "The Determinants of Volatility Timing Performance," Journal of Financial Econometrics, Oxford University Press, vol. 21(4), pages 1228-1257.
    7. Taylor, Nick, 2017. "Timing strategy performance in the crude oil futures market," Energy Economics, Elsevier, vol. 66(C), pages 480-492.

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