A Practical Guide to Forecasting Financial Market Volatility (The Wiley Finance Series) [Hardcover]

Ser-Huang Poon (Author)

Book Description

Series: The Wiley Finance Series | Publication Date: June 20, 2005

Financial market volatility forecasting is one of today's most important areas of expertise for professionals and academics in investment, option pricing, and financial market regulation. While many books address financial market modelling, no single book is devoted primarily to the exploration of volatility forecasting and the practical use of forecasting models. A Practical Guide to Forecasting Financial Market Volatility provides practical guidance on this vital topic through an in-depth examination of a range of popular forecasting models. Details are provided on proven techniques for building volatility models, with guide-lines for actually using them in forecasting applications.

Editorial Reviews

From the Back Cover

Volatility forecasting is crucial for option pricing, risk management and portfolio management. This book gives clear and practical guidance on how to model and forecast volatility using only volatility models that have been tested for their forecasting performance. The book focuses on describing, evaluating and comparing research in volatility forecasting and provides some background on volatility definition, estimation and some principles on forecasts evaluation. The book covers both time series econometric volatility models and implied volatility model based on Black-Scholes and continuous time stochastic volatility option pricing models.

"The present book by Professor Ser-Huang Poon surveys this literature carefully and provides a very useful summary of the results available. By so doing, she allows any interested worker to quickly catch up with the field and also to discover the areas that are still available for further exploration."
—Sir Clive W. J. Granger, University of California in San Diego

"Professor Poon exposes in her book current state-of-the-art volatility forecasting methods. Beginning with a description of various conditional volatility models, be it discrete or continuous, the link with option pricing models is well established. The book proceeds with surveying the current volatility literature: what type of volatility should be used to price options, how can volatility of various assets be predicted, how volatility can be used within a value-at-risk setting. This well written book should be useful both for the practitioner and the academic/student interested in volatility."
—Professor Michael Rockinger, FAME and University of Lausanne, Switzerland

About the Author

Dr SER-HUANG POON was promoted to Professor of Finance at Manchester University in 2003. Prior to that, she was a senior lecturer at Strathclyde University. Ser-Huang graduated from the National University of Singapore and obtained her masters and PhD from Lancaster University, UK. She has researched financial market volatility for many years and has published in many top ranking peer reviewed finance and financial econometric journals with many co-authors from around the world. Her financial market volatility work was cited as a reference reading on the Nobel web site in 2003.

Product Details

• Hardcover: 236 pages
• Publisher: Wiley; 1 edition (June 20, 2005)
• Language: English
• ISBN-10: 0470856130
• ISBN-13: 978-0470856130
• Product Dimensions: 9.1 x 6.4 x 0.9 inches
• Shipping Weight: 1.1 pounds (View shipping rates and policies)
• Average Customer Review: 3.0 out of 5 stars  See all reviews (1 customer review)
• Amazon Best Sellers Rank: #1,377,447 in Books (See Top 100 in Books)

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1 of 1 people found the following review helpful:

3.0 out of 5 stars First Review after Seven Years, April 3, 2011

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x64 (Cambridge, MA) - See all my reviews

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This review is from: A Practical Guide to Forecasting Financial Market Volatility (The Wiley Finance Series) (Hardcover)

As it regularly happens to titles in the Wiley Finance series, the title is misleading. This is not a practical guide to forcasting volatility but a review of the academic studies comparing the forcating power of various ARCH, GARCH, FARCH time series methods.

The author is a business school professor in the U.K., who is well respected in the time-series community. Two years before the publication of the current volume she co-authored a review (first star) on the same topics with one of the Nobel laureates on the subject. Assuming that the book is a hardcover version of the same review, this lends some authorativeness to its contents (second star).

To the reviewer the real practical value of the book and of the underlying study is in its following two findings (third and fourth stars).

1. Every self-respecting inventor of a new ARCH, GARCH, FARCH method also publishes a separate academic study showing that his/her method is superior to any of the other ones. Hence time can be saved for better use by ignoring all these studies.

2. Continuous-time stochastic volatility models based on stochastic differential equations consistently outperform discretely sampled time-series models that are based on daily observations. Hence more time can be saved for better use by ignoring the entity of this particularly voluminous body of literature. (The book doesn't cover realized volatility based on high frequency data. Hence the above conclusion doesn't apply to this body of work.)

Having reached the zenith of four stars, one star is subtracted for the author trying to impress her readers with stuff that is clearly over her head. It is a typical fallacy of business school professors, that they try to look to be mathematicians and make fool of themselves in the process.

Here is an example. Chapter 9 of the book is devoted to Option Pricing with Stochastic Volatility and covers the Heston model (Sec.9.1-9.4). Then in Sec.9.5, which attempts to explain the meaning of the Market Price of Volatility, the volatility process is unexpectedly changed form CIR to OU. The justification given is that volatility must be positive. Well, the CIR process was positive, the OU isn't (first flashing warning sign). Then follow seven pages of formulas closely resembling the same derivation by Fouque, Papanicoulau and Sircar (FPS), albeit with different notation. And that's where the devil hits. At a particular point in the derivation an "arbitrary function" appears. The author names it "f", in accordance with how "arbitary functions" are usually denoted in math classes. Than she cut-and-pastes in the final formula from FPS, which also contains the symbol "f". Unfortunately FPS uses "f" to denote a totally different function that doesn't even show up in Ms.Poon's book. In short, Sec.9.5 makes no sense.

Final verdict: 3 stars.