November 20th, 2003, 7:47 am
ok, I calculate abs(log(sigma_est^2)-log(sigma_obs^2)) and compare the models. The different GARCH models still perform much worse than the other simple models. For the MAE and RMSE as I used before, the forecast for the vola of tomorrow even gave worse value than the forecast for the vola in 5 days from now (looking at the daily vola only, and not the sum over the next five days, i.e. predicted value for t+5 compared to observed vola at t+5).The log measure as above, do have this last property, but the improvement is small.I almost draw the conclusion, that forecasting vola is a pretty difficult thing. Many recent papers come up with all kinds of stochastic vola models, and they all compare the forecast ability with standard GARCH (1,1). They are often very happy because their models do better forecasts. I ask the question whether we should put so much effort into this field, or maybe just use e.g. weighted moving average, and then put our energy on other things.Take the day off and head off to the bar...