New Evidence on the Longer Horizon Predictability of Return Volatility of the German Dax: An Assessment with Model-Free Test Procedures

Abstract

Volatility of financial returns as a measure of risk is a key parameter in asset pricing and risk management and holding periods for financial instruments of several weeks or month are common in many financial institutions. Nevertheless, little is known about the predictability of return volatility at longer horizons. This paper investigates the predictability of return volatility of the German DAX for forecasting horizons from one day to 45 days. To avoid joint assessments of predictability and assumed volatility models three model-free test procedures, which are based on an intuitive definition of predictability, are considered. Contrary to earlier findings according to which the return volatility of the DAX is only predictable for 10 to 15 trading days, the empirical evidence provided in this study suggests that the volatility of DAX returns is predictable for horizons of up to 35 trading days and may be forecastable at even longer horizons.