Answering the skeptics: yes, standard volatility models do provide accurate forecasts*
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Cites background from "Answering the skeptics: yes, standa..."
...In equation (3), shocks to a stock’s own volatility are correlated with shocks to the stochastic volatility factor in the pricing kernel (2)....
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...dmt mt = −rfdt− η t dWt − η t dVt, (2)...
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References
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"Answering the skeptics: yes, standa..." refers background in this paper
...Meanwhile, it is a well-established fact, dating back to Mandelbrot (1963) and Fama (1965), that financial returns display pronounced volatility clustering....
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"Answering the skeptics: yes, standa..." refers background in this paper
...Diebold, F.X. and R.S. Mariano (1995), "Comparing Predictive Accuracy," Journal of Business and Economic Statistics, 13, 253-263....
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...…the MSE may be a natural choice when evaluating traditional model forecasts for the conditional mean, it is less7 obvious in a heteroskedastic environment; see, e.g., Bollerslev, Engle and Nelson (1994), Engle et al. (1993), Diebold and Mariano (1995), Lopez (1995), and West, Edison and Cho (1993)....
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