Are combination forecasts of S&P 500 volatility statistically superior?

Forecasting volatility has received a great deal of research attention. Many articles have considered the relative performance of econometric model based and option implied volatility forecasts. While many studies have found that implied volatility is the preferred approach, a number of issues remain unresolved. One issue being the relative merit of combination forecasts. By utilising recent econometric advances, this paper considers whether combination forecasts of S&P 500 volatility are statistically superior to a wide range of model based forecasts and implied volatility. It is found that combination forecasts are the dominant approach, indicating that the VIX cannot simply be viewed as a combination of various model based forecasts. Keywords: Implied volatility, volatility forecasts, volatility models, realized volatility, combination forecasts. JEL Classi…cation: C12, C22, G00. Acknowledgements Corresponding author Adam Clements School of Economics and Finance Queensland University of Technology GPO Box 2434, Brisbane Q, Australia 4001 email [email protected] Ph +61 7 3864 2525, Fax +61 7 3864 1500.