Forecasting Volatility in Financial Markets: A Review

Given the importance of volatility forecasting and that so much has been written on the subject, this paper aims to provide comprehensive coverage of the status of this research. Taking a utilitarian viewpoint, it is believed that the success of a volatility model lies in its out-of-sample forecasting power. It is impossible, in practice, to perform tests on all volatility forecasting models on a large number of data sets and over many different periods. By carefully reviewing the methodologies and empirical findings in 93 papers, the contribution of this review is to provide a bird's-eye view of the whole volatility forecasting literature and to provide some recommendations for the practice and future research.