Do Better Volatility Forecasts Lead to Better Portfolios? Evidence from Graph Neural Networks

Abstract

This paper tests whether graph neural networks improve realized volatility forecasts and whether those forecasts improve portfolio performance. Using weekly realized volatility for 465 S&P 500 equities from 2015-2025, Heterogeneous Autoregressive and Long Short-Term Memory baselines are compared against GraphSAGE models built on rolling correlation, sector, and Granger-causal graphs, with and without macro regime features. The empirical finding is that the model with the lowest forecast MSE, the model with the highest cross-sectional ranking accuracy, and the model with the highest portfolio Sharpe ratio are three different models. Forecast accuracy, ranking quality, and portfolio performance are related but not interchangeable objectives. Graph volatility models add value only when the portfolio rule can exploit the cross-sectional structure they encode.