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Forecasting aggregate market volatility: The role of good and bad uncertainties

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  • Li Liu
  • Yudong Wang

Abstract

We decompose economic uncertainty into "good" and "bad" components according to the sign of innovations. Our results indicate that bad uncertainty provides stronger predictive content regarding future market volatility than good uncertainty. The asymmetric models with good and bad uncertainties forecast market volatility in a better way than the symmetric models with overall uncertainty. The combination for asymmetric uncertainty models significantly outperforms the benchmark of autoregression, as well as the combination for symmetric models. The revealed volatility predictability is further demonstrated to be economically significant in the framework of portfolio allocation.

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  • Li Liu & Yudong Wang, 2021. "Forecasting aggregate market volatility: The role of good and bad uncertainties," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 40(1), pages 40-61, January.
    • Handle: RePEc:wly:jforec:v:40:y:2021:i:1:p:40-61
    DOI: 10.1002/for.2694
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    4. Danyan Wen & Mengxi He & Yaojie Zhang & Yudong Wang, 2022. "Forecasting realized volatility of Chinese stock market: A simple but efficient truncated approach," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 41(2), pages 230-251, March.

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