Comparative Performance of Volatility Forecasting Models in Indian Markets

Abstract

Volatility forecasting is an important area of research to financial markets and lot of effort has been expended in improving volatility models since better forecasts translates into better pricing of options and better risk management. In this direction, this paper attempts to evaluate the ability of ten different statistical and econometric volatility forecasting models to the context of Indian stock and forex markets. These competing models are evaluated on the basis of two categories of evaluation measures – symmetric and asymmetric error statistics. Based on an out - of - sample forecasts and using a majority of evaluation measures Ire find that G.-I RCH 11. I, and EW.1 L4 methods will lead to Netter volatility forecasts in the Indian stock market and G.4RCH (5, I) will achieve the same in the forex market The same models perform better on the basis of asymmetric error statistics also.