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Financial Vulnerability and Volatility in Emerging Stock Markets: Evidence from GARCH-MIDAS Models

Author

Listed:
  • Riza Demirer

    (Department of Economics & Finance, Southern Illinois University Edwardsville, Alumni Hall 3145, Edwardsville IL, 62026-1102, USA)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Private Bag X20, Hatfield, 0028, South Africa)

  • He Li

    (School of International Economics and Politics, Liaoning University, Shenyang, Liaoning, China)

  • Yu You

    (Li Anmin Advanced Institute of Finance and Economics, Liaoning University, Shenyang, Liaoning, China)

Abstract

This paper establishes a predictive relationship between financial vulnerability and volatility in emerging stock markets. Focusing on China and India and utilizing GARCH-MIDAS models, we show that incorporating financial vulnerability can substantially improve the forecasting power of standard macroeconomic fundamentals (output growth, inflation and monetary policy interest rate) for stock market volatility. The findings have significant implications for investors to improve the accuracy of volatility forecasts.

Suggested Citation

  • Riza Demirer & Rangan Gupta & He Li & Yu You, 2021. "Financial Vulnerability and Volatility in Emerging Stock Markets: Evidence from GARCH-MIDAS Models," Working Papers 202112, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:202112
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    References listed on IDEAS

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    Cited by:

    1. Salisu, Afees A. & Demirer, Riza & Gupta, Rangan, 2022. "Financial turbulence, systemic risk and the predictability of stock market volatility," Global Finance Journal, Elsevier, vol. 52(C).
    2. Ruipeng Liu & Rangan Gupta & Elie Bouri, 2021. "Conventional and Unconventional Monetary Policy Rate Uncertainty and Stock Market Volatility: A Forecasting Perspective," Working Papers 202178, University of Pretoria, Department of Economics.

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    More about this item

    Keywords

    Stock Market Volatility; Financial Vulnerability; GARCH-MIDAS; Emerging Markets;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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