by Martin Armstrong, Armstrong Economics:
QUESTION: Dear Martin,
I am an reader of your blog and attendee of some of your conferences. I am quite impressed about the timing of your forecasting arrays. In particular, May 1 you published the arrays for DJIA (attached) where you showed two clusters of volatility: the weeks of 15 May and 26 June. I was really stupefied when I witnessed two vicious drops in XIV (an ETF replicating the inverse of 60 days expected implied volatility of S&P500) precisely in the weeks you indicated. The best model academia has come up with for modelling volatility is a Stochastic Volatility Model with Jumps, where returns of the underlying (index) are random, their volatility is random (mean reverting though) and infrequent jumps also occur randomly. In fewer words forecasting volatility is just impossible for academics, but not for you.