Forecasting Stock Market (Realized) Volatility in the United Kingdom: Is There a Role for Economic Inequality?

This paper explores the potential role of economic inequality for forecasting the stock market volatility of the United Kingdom (UK). Utilizing linear and nonlinear models as well as measures of consumption and income inequalities over the period of 1975 to 2016, we find that linear models incorporating the information of growth in inequality indeed produce lower forecast errors. These models, however, do not necessarily outperform the univariate linear and nonlinear models based on formal statistical forecast comparison tests, especially in short- to medium-runs. On the other hand, at a one-year-ahead horizon, absolute measure of consumption inequality results in significant statistical gains for stock market volatility predictions. We argue that the long-run predictive power of consumption inequality is driven by its informational content over both political and social uncertainty in the long-run.