Understanding current risk (beta and sigma) and performance (alpha) is important. Having a forecast of the future volatility of an asset class can also be beneficial. Though returns for both the stock market and venture remain unpredictable at the dollar level, our research revealed the same useful predictive element economists have observed in stock market volatility (sigma), in the volatility of venture returns.

Sand Hill Econometrics has created the Forecast of Volatility using the GARCH (1, 1) model. Our approach is the one that many other researchers, including Robert Engle, have found to be the most powerful in predicting future variance. We have applied this model, using both monthly returns and month-end annual returns from the Sand Hill Index to estimate a time series of the conditional variance of these returns, and then to forecast the variance of return 12 months ahead. Volatility is expressed in terms of the standard deviation, or the square root of the variance. For this report, we construct similar estimates for the DJ Wilshire 5000 to provide a basis of comparison, and also break down the Sand Hill Index into its component industry indices.

This measure can be useful when modeling value-at-risk, or can just serve as a signal of when to worry. The report is published quarterly and is available for an annual subscription price of $1,000.