Historical Perspectives in Volatility Forecasting Methods with Machine Learning

Volatility forecasting for financial institutions plays a pivotal role across a wide range of domains, such as risk management, option pricing, and market making. For instance, banks can incorporate volatility forecasts into stress testing frameworks to ensure they are holding sufficient capital during extreme market conditions. However, volatility forecasting is challenging because volatility can only be estimated, and different factors influence volatility, ranging from macroeconomic indicators to investor sentiments. While recent works show promising advances in machine learning and artificial intelligence for volatility forecasting, a comprehensive assessment of current statistical and learning-based methods is lacking. Thus, this paper aims to provide a comprehensive survey of the historical evolution of volatility forecasting with a comparative benchmark of key landmark models, such as implied volatility, GARCH, LSTM, and Transformer. We open-source our benchmark code to further research in learning-based methods for volatility forecasting.

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Publication Details

Journal
Risks
Published
2025-05-20
DOI
https://doi.org/10.3390/risks13050098
Citations
6
Primary Topic
Market Dynamics and Volatility
Type
article
Field-Weighted Citation Impact
18.79

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article

Historical Perspectives in Volatility Forecasting Methods with Machine Learning

Fabien Scalzo, Eun Sang, Clemens Kownatzki, Zhen‐Bin Qiu
6 citations
Risks
Market Dynamics and Volatility
18.79
article

Historical Perspectives in Volatility Forecasting Methods with Machine Learning

Fabien Scalzo, Eun Sang, Clemens Kownatzki, Zhen‐Bin Qiu
article en
6 citations

Abstract

Volatility forecasting for financial institutions plays a pivotal role across a wide range of domains, such as risk management, option pricing, and market making. For instance, banks can incorporate volatility forecasts into stress testing frameworks to ensure they are holding sufficient capital during extreme market conditions. However, volatility forecasting is challenging because volatility can only be estimated, and different factors influence volatility, ranging from macroeconomic indicators to investor sentiments. While recent works show promising advances in machine learning and artificial intelligence for volatility forecasting, a comprehensive assessment of current statistical and learning-based methods is lacking. Thus, this paper aims to provide a comprehensive survey of the historical evolution of volatility forecasting with a comparative benchmark of key landmark models, such as implied volatility, GARCH, LSTM, and Transformer. We open-source our benchmark code to further research in learning-based methods for volatility forecasting.

RisksVol. 13(5)
Pepperdine University (US), Korea University (KR)
W. M. Keck Foundation, Pepperdine University
Openalex Percentile: Top 1%
Market Dynamics and Volatility
18.79
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