BFS 2002

Poster Presentation

Volatility forecasting performances of SVOL and AJD models for very volatile markets

Rosanna Pezzo, Maria-Cristina Uberti

In this paper we apply two well-known models generally used for option pricing to forecast volatility in very volatile markets and compare their performances. The models used in our evaluation are the Stochastic Volatility (SVOL) model and the Affine Jump-Diffusion (AJD) model with jumps in return and volatility (originally proposed by Duffie, Pan and Singleton).
In our study, we first implement both models SVOL and AJD and calibrate them using one year of real data; then we forecast the return and volatility series using the calibrated models. Finally the volatility estimated by the two models is compared with the actual one. Our results show how jumps in return and volatility play an important role in volatility forecasting, especially in highly volatile markets. In addition, from the comparison between the forecast capabilities of the analysed models, we suggest possible modifications of the two models for improving their results.