Financial Volatility Forecasting

The volatility of equity and foreign exchange market is an important input to portfolio selection and to asset pricing models. Many investment decisions and valuation of derivatives frequently rely on predictions of volatility. In this paper we review the existing empirical literature in forecasting volatility of financial time series. Particularly, we decompose the forecasting procedure into the choice of an "actual" volatility measure (since volatility is unobservable), the relavant forecasting horizon, the forecasting rule to emplyed and the criterion is used in the volatility forecasting evaluation