Stephen Satchell-Forecasting Volatility in the Financial Markets

429 Pages·2007·9.65 MB·English

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Forecasting Volatility in the Financial Markets
Quantitative Finance Series
Aims and Objectives
•
books based on the work of financial market practitioners, and academics
•
presenting cutting edge research to the professional/practitioner market
•
combining intellectual rigour and practical application
•
covering the interaction between mathematical theory and financial practice
•
to improve portfolio performance, risk management and trading book performance
•
covering quantitative techniques
Market
Brokers/Traders; Actuaries; Consultants; Asset Managers; Fund Managers; Regulators;
Central Bankers; Treasury Officials; Technical Analysts; and Academics for Masters in
Finance and MBA market.
Series Titles
Return Distributions in Finance
Derivative Instruments
Managing Downside Risk in Financial Markets
Economics for Financial Markets
Performance Measurement in Finance
Real R&D Options
Forecasting Volatility in the Financial Markets, Third Edition
Advanced Trading Rules, Second Edition
Advances in Portfolio Construction and Implementation
Computational Finance
Linear Factor Models in Finance
Initial Public Offerings
Funds of Hedge Funds
Venture Capital in Europe
Series Editor
Dr Stephen Satchell
Dr Satchell is the Reader in Financial Econometrics at Trinity College, Cambridge; Vis-
iting Professor at Birkbeck College, City University Business School and University of
Technology,Sydney.Healsoworksinaconsultativecapacitytomanyfirms,andeditsthe
journal Derivatives: use, trading and regulations and the Journal of Asset Management.
Forecasting Volatility in the
Financial Markets
Third edition
Edited by
John Knight
Stephen Satchell
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Contents
List of contributors vii
Preface to third edition ix
Introduction xi
1 Volatility modelling and forecasting in finance 1
Linlan Xiao and Abdurrahman Aydemir
2 What good is a volatility model? 47
Robert F. Engle and Andrew J. Patton
3 Applications of portfolio variety 65
Dan diBartolomeo
4 A comparison of the properties of realized variance for the FTSE 100
and FTSE 250 equity indices 73
Rob Cornish
5 An investigation of the relative performance of GARCH models versus
simple rules in forecasting volatility 101
Thomas A. Silvey
6 Stochastic volatility and option pricing 131
George J. Jiang
7 Modelling slippage: an application to the bund futures contract 173
Emmanuel Acar and Edouard Petitdidier
8 Real trading volume and price action in the foreign exchange markets 187
Pierre Lequeux
9 Implied risk-neutral probability density functions from option prices:
a central bank perspective 201
Bhupinder Bahra
10 Hashing GARCH: a reassessment of volatility forecasting performance 227
George A. Christodoulakis and Stephen E. Satchell
vi Contents
11 Implied volatility forecasting: a comparison of different procedures
including fractionally integrated models with applications to UK
equity options 249
Soosung Hwang and Stephen E. Satchell
12 GARCH predictions and the predictions of option prices 279
John Knight and Stephen E. Satchell
13 Volatility forecasting in a tick data model 295
L.C.G. Rogers
14 An econometric model of downside risk 301
Shaun Bond
15 Variations in the mean and volatility of stock returns around
turning points of the business cycle 333
Gabriel Perez-Quiros and Allan Timmermann
16 Long memory in stochastic volatility 351
Andrew C. Harvey
17 GARCH processes – some exact results, some difficulties
and a suggested remedy 365
John L. Knight and Stephen E. Satchell
18 Generating composite volatility forecasts with random factor betas 391
George A. Christodoulakis
Index 407
List of contributors
E. Acar
Bank of America, UK
A.B. Aydemir
Family and Labour Studies Division, Statistics Canada, Ottawa, Canada
B. Bahra
Bank of England, UK
S. Bond
University of Cambridge, Cambridge, UK
G.A. Christodoulakis
Faculty of Finance, Manchester Business School, UK
R. Cornish
Global Asset Management Ltd, London, UK
D. diBartolomeo
Northfield Information Services, Inc., Boston, USA
R.F. Engle
Stern School of Business, New York University, USA
A.C. Harvey
Faculty of Economics, University of Cambridge, UK
S. Hwang
Cass Business School, London, UK
G.J. Jiang
Finance Department, Eller College of Business and Public Administration, University of
Arizona, USA
J.L. Knight
Department of Economics, University of Western Ontario, Canada
P. Lequeux
Banque Nationale de Paris plc, London, UK
Linlan Xiao
Department of Economics, University of Western Ontario, Canada
A.J. Patton
Financial Markets Group, London School of Economics, UK
viii Listofcontributors
G. Perez-Quiros
Federal Reserve Bank of New York, USA
E. Petitdidier
Systeia Capital Management, Paris, France
L.C.G. Rogers
Department of Mathematics, University of Cambridge, UK
S.E. Satchell
Faculty of Economics, Trinity College and University of Cambridge, UK
T.A. Silvey
Trinity College, Cambridge, UK
A. Timmermann
Department of Economics, University of California, San Diego, USA