Abstract
One of the reasons for the success of the generalized autoregressive conditional heteroscedasticity (GARCH) model is that volatility can be forecast; indeed, it assumes that it is known one-period ahead. This should have important implications for forecasting asset prices and instruments contingent upon asset prices, such as options and futures. This chapter discusses in detail the properties of predictions based on a GARCH model, because this is a popular choice for applied economists. It is interesting to investigate the effect of the GARCH process on option pricing models because option prices are substantially influenced by the volatility of underlying asset prices as well as the price itself.
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