Volatility timing and portfolio selection: How best to forecast volatility

Within the context of volatility timing and portfolio selection this paper considers how best to estimate a volatility model. Two issues are dealt with, namely the frequency of data used to construct volatility estimates, and the loss function used to estimate the parameters of a volatility model. We find support for the use of intraday data for estimating volatility which is consistent with earlier research. We also find that the choice of loss function is important and show that a simple mean squared error loss, overall provides the best forecasts of volatility upon which to form optimal portfolios.