The economic value of volatility forecasts: A conditional approach∗

This paper provides an investigation of the economic value of multivariate volatility forecasting ability using a testing framework in which the quality of competing methods is assessed from a conditional investment perspective. In doing this we are able to provide a novel means by which the benefits of using a particular set of volatility forecasts can be assessed. The results associated with an application to US bond and stock futures markets indicate that investors are willing to pay a significant premium for knowledge of the dynamics of volatility, though the magnitude of this premium varies over time, and depends on risk preferences and economic conditions. The latter variation implies that selection of appropriate dynamics (this is, forecasting method choice) should be a conditional exercise.