APS 425 Case #4: due December 1, 2015


The Excel spreadsheet A425_case415.XLSX [or the equivalent Eviews file, A425_case415.WF1] contains daily levels (SP500) and returns to the S&P 500 portfolio (SPRET) and to the NASDAQ composite portfolio (NASDAQ and NASRET) from January 2, 1986 through October 30, 2015. It also includes the volatility indexes from the Chicago Board Options Exchange (CBOE). The VIX is the index of implied volatility from put and call options on the S&P 500 portfolio, and the VXN is the index of implied volatility from put and call options on the Nasdaq composite portfolio (available since 1995).

Your assignment is to build an ARCH or GARCH model for volatility for both the S&P and NASDAQ portfolios. You should also compare the forecasts from the ARCH/GARCH model with the VIX and VXN data. Is there reason to believe that the options market uses information beyond historical stock returns to forecast future volatility? Why, or why not?

[Note: since the goal of a forecasting model is to predict the future, it is up to you to decide how much, and which, data to use in your modeling exercise.]


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Last Updated on 12/1/2015