Implied Volatility Forecasting: A Comparison of Different Procedures Including Fractionally Integrated Models with Applications to UK Equity Options

The purpose of this paper is to consider how to forecast implied volatility for a selection of UK companies with traded options on their stocks. We consider a range of GARCH and logARFIMA based models as well as some simple forecasting rules. Overall, we find that a logARFIMA model forecasts best over short and long horizons. Key-words : Implied Volatility, Forecasting, ARFIMA, GARCH, log-ARFIMA, Long Memory, Options, Fractional Integration. The authors are grateful to Mr. Carl Moss of Dresdner Kleinwort Benson for his suggestions and the insightful comments of two anonymous referees. The first author would like to thank the Newton Trust and Kleinwort Benson for financial support and the second author would like to thank Inquire for financial support.