Volatility Forecasting in a Data Rich Environment

Abstract

This Chapter reviews the main classes of models that incorporate volatility, with a focus on the most recent advancements in the financial econometrics literature and on the challenges posed by the increased availability of data. There are limits to the feasibility of all models when the cross-sectional dimension diverges, unless strong restrictions are imposed on the model’s dynamics. In the latter case, the models might become feasible at the expense of reduced economic intuition that can be recovered from the model fit. In turn, this could have a negative impact on the forecast and the identification of its drivers.