ARC Future Fellowships - Grant ID: FT0991045

Funder

Australian Research Council

Funding Amount

$834,200.00

Summary

A Bayesian State Space Methodology for Forecasting Stock Market Volatility and Associated Time-varying Risk Premia. Accurate prediction of stock market volatility is critical for effective financial risk management. Along with information on volatility embedded in historical stock market returns, the prices of options written on the underlying stocks also reflect the option market's assessment of future volatility. This project will exploit this dual data source in a completely new way, using it .... A Bayesian State Space Methodology for Forecasting Stock Market Volatility and Associated Time-varying Risk Premia. Accurate prediction of stock market volatility is critical for effective financial risk management. Along with information on volatility embedded in historical stock market returns, the prices of options written on the underlying stocks also reflect the option market's assessment of future volatility. This project will exploit this dual data source in a completely new way, using it to produce forecasts of both volatility itself and the premia factored into asset prices as a result of traders' perceptions of volatility risk. State-of-the-art statistical methods will be used to produce up-dates of the probability of extreme volatility and/or extreme risk aversion, as new market data becomes available each trading day.
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