Forecasting stock index volatility (Q2722284)

Volatility modelling has been a very active area of research in recent years, mainly when referred to financial markets. Volatility measures are in fact crucial in many financial areas such as risk management and asset pricing. This paper is concerned with how to construct stock index volatility predictors using the returns histories of the stocks that define the index. The results reported in this paper suggest that different volatility measures, one applied to down and another to up movements in prices, provide useful information concerning volatility estimates of prices over time. Furthermore, it is found that the volatility of a stock index can be explained by the one of its related components and that different stocks explain downside and upside volatility of the index. The Italian Stock Index MIB30, along the 30-blue-chip stocks on which it is calculated, provide the time-series returns to test the model.