Volatility Forecasting and Liquidity: Evidence from Individual Stocks

30 Pages Posted: 24 May 2008

See all articles by Peter A. Brous

Peter A. Brous

Seattle University

Ufuk Ince

University of Washington, Bothell - Business

Ivilina Popova

Texas State University

Date Written: May 23, 2008

Abstract

We find that, on average, for the full sample of stocks comprising the S&P 100 index, theoretically superior implied volatilities are less accurate forecasts than historically based forecasts of future volatilities. However, when we split our sample based on proxies for liquidity, we find that implied volatility forecasts are more accurate than historical volatility forecasts for more liquid stocks, and the inverse is true for the subsample of less liquid stocks. Additionally, we document that among historical measures, Parkinson's extreme value estimator and the adjusted mean absolute deviation are more accurate than the alternative historical estimators. Overall, our results suggest that, for high liquidity stocks, the implied volatility measure is likely to provide a more accurate forecast of future volatility but for low liquidity stocks Parkinson's extreme value estimator and the adjusted mean absolute deviation using historical prices are likely to provide the best forecasts.

Keywords: Volatility forecasting, Options, Liquidity

JEL Classification: C53, G13, G12

Suggested Citation

Brous, Peter A. and Ince, Ufuk and Popova, Ivilina, Volatility Forecasting and Liquidity: Evidence from Individual Stocks (May 23, 2008). Available at SSRN: https://ssrn.com/abstract=1136915 or http://dx.doi.org/10.2139/ssrn.1136915

Peter A. Brous

Seattle University ( email )

Broadway and Madison
Department of Economics & Finance
Seattle, WA 98121-4460
United States
206-296-6495 (Phone)
206-296-2486 (Fax)

Ufuk Ince

University of Washington, Bothell - Business ( email )

18115 Campus Way NE
Bothell, WA 98011-8246
United States

Ivilina Popova (Contact Author)

Texas State University ( email )

601 University Drive
San Marcos, TX 78666-4616
United States

HOME PAGE: http://https://faculty.txst.edu/profile/520678

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