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Financial statement information for volatility estimation
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This work extends Sridharan’s (2015) results, who found a significant relationship between financial variables and realized volatility. In particular, the introduction of Size, Research and Development Expenditures, Sales Growth, Cash Flow Volatility, Earnings Opacity, Leverage, Return on Assets and Equity Book-to-Market Ratio in a model based on the volatility implied in option market prices presented improved results. Applying a similar methodology to a different set of data, it is found that only three of those variables affect realized volatility in my sample. Leverage and Equity Book-to-Market Ratio have a negative impact and Return on Assets a positive impact. It is hypothesized that financial variables should also be useful in the construction of a traditional ARCH model. This is confirmed empirically and it is shown that the better volatility forecasts, provided by the introduction of these financial variables, can be used to construct a successful investment strategy that outperforms the market.
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Volatility Modeling Financial variables ARCH