ABSTRACT

Volatility can be described broadly as anything that is changeable or variable. Volatility is of enormous importance to everyone involved in the financial markets, where it is thought of more in terms of unpredictability. In the Black-Scholes option pricing formula, returns volatility of the underlying asset is an important parameter, and its importance is magnified by the fact that it is the only one variable that is not directly observable. Low frequency data allows only low frequency or macroeconomic fluctuations to be seen, while higher frequency data reveals more about the volatility properties. Factors which influence volatility over the short-term include trading volume, contrarian trade, and the introduction of futures and options. In modeling volatility, time series statistics are used to find the best forecast of volatility. The most important development in modelling volatility changes was the autoregressive conditional heteroskedasticitv or autoregressive conditional heteroskedasticitv model, introduced by R. F. Engle.