Volatility models for financial instruments

<p>The present project proposal is aimed at examining volatility forecasting models and applying econometric tests in order to choose the best model from ARCH class. We have reviewed the existing literature on the topic, in particular ARCH and GARCH models were considered in more details. These models are used commonly to analyze financial time series with time-varying volatility so we intend to apply models to prices for financial instruments. We plan to obtain the prices for financial instruments like options and futures for comparing volatility models from &ldquo;Yahoo Finance&rdquo;, which is available for free in the internet.</p><p>When choosing the best volatility model we intend utilize some specific methods like maximization of likelihood function, BIC, AIC, Box and Pierce test and Ljung and Box test. The results anticipated may be disputable. For example, BIC and AIC often give contradictory results. However, GARCH model is more likely to be the best one, because it considers more important factors.</p><p>In order to decide what volatility forecasting model is better, we intend to conduct some tests like likelihood function, BIC, AIC, Box and Pierce test and Ljung and Box test.</p><p>We assume that the work will be a useful for financial managers and academic economists. Future developments is possible, in particular we intend to develop existing tests for comparing volatility models. In addition it is important to evolve out-of-sample tests, which can be suitable to different set of data.</p>