From the February 01, 2008 issue of Futures Magazine • Subscribe!

Forecasting Volatility in the Financial Markets

Edited By John Knight & Stephen Satchell


$89.95, 415 pages

The editors’ focus is to present recent research on volatility in the financial markets with an emphasis on forecasting volatility. The recommended audience, advanced traders with a grasp of the principles and methods of volatility measurement and traders looking to gain knowledge of volatility models, will appreciate this book, as will options traders. The focus on volatility will enhance their understanding of option pricing models. This book is not for the beginner or even an intermediate trader who does not have a firm foundation in the subject matter.

The book includes a number of contributors, and it suffers from a lack of consistency in its presentation. Some chapters contain a helpful abstract, summary or introduction at the beginning of the chapter, but not all. Readers would have benefited if all chapters contained these sections. If the editors took the various chapters and summarized them, the book would have a consistent flow. The book also would have benefited from more illustrations.

The options trader can gain insight from reviewing various methodologies that analyze option pricing formulas from Black-Scholes, Merton and others. Different volatility models are illustrated to help forecast different pricing formulas and, as such, forecast option price chains that yield different forecasts. Option traders who depend on option pricing software can gain a better understanding of how to calculate volatility. Random walk, moving average, historic mean and exponential smoothing are discussed as they relate to volatility; but again, would be better understood with more illustrations and examples. The text does not do a good job graphically illustrating some concepts, such as relative high and low volatility periods. It should have had more practical examples describing how to trade high and low volatility.

The text does provide an interesting example of forecasting volatility by analyzing liquidity cost and time of day. In addition, the chapter forecasting volatility on a tick data model provides ideas that the trader can further analyze to provide new insights. This weighty book provides many unique insights into volatility and benefits from the insights of many capable contributors but the lack of consistency of presentation, cohesiveness and illustrative examples undermines its authority and usefulness.

Lawrence M. Seldin, CMC, CPC, has been involved with trading futures, options and currencies since 2002. He can be reached at larry@seldin.netor

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