Volatility Expectations and Disagreement

Abstract

This paper examines the use of survey-based measures in volatility forecasting. We argue that the dispersion of individual mean return forecasts bridges the gap between individual volatilities and aggregate volatility. We use data coming from a repeated survey to capture volatility and mean return expectations of investors, and to produce aggregate volatility forecasts. Our survey-based measures are consistent and quantitatively similar with forecasts based on GARCH and implied volatility models. This result is robust to both in-sample and out-of-sample comparisons and in response to news. As an implication, disagreement can be regarded as an integral part of risk.

Keywords: volatility forecasting, disagreement, survey data

JEL Classification: C42, C53, G12