What good is a volatility model?
Top Cited Papers
- 1 February 2001
- journal article
- Published by Taylor & Francis in Quantitative Finance
- Vol. 1 (2) , 237-245
- https://doi.org/10.1088/1469-7688/1/2/305
Abstract
A volatility model must be able to forecast volatility; this is the central requirement in almost all financial applications. In this paper we outline some stylized facts about volatility that should be incorporated in a model: pronounced persistence and mean-reversion, asymmetry such that the sign of an innovation also affects volatility and the possibility of exogenous or pre-determined variables influencing volatility. We use data on the Dow Jones Industrial Index to illustrate these stylized facts, and the ability of GARCH-type models to capture these features. We conclude with some challenges for future research in this area.Keywords
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