Forecasting the Volatility of S&P 500 after Covid-19 Pandemic Using GARCH Model

Abstract

Every country's stock exchanges reflect the health of its financial markets.An understanding of volatility is a prerequisite for calculating the risk-return trade-off in the stock market.In this paper, I made an attempt to predict the volatility of the S&P 500 due to the current COVID-19 pandemic which is affecting the US stock market. In this study, I usedGARCH (Generalized Autoregressive Conditional Heteroscedasticity) model to analyze the volatility pattern of S&P 500 for the period between 1^st January, 2000 and 7^th December, 2021 which has a total of 3508 observations.According to the analysis, GARCH(2,2) is the most effective method of predicting future volatility of S&P 500. The model predicted the volatility with very good accuracy and finally the volatility prediction was done for next seven days.