Forecasting stock market volatility conditional on macroeconomic conditions
AbstractThis paper presents a GARCH type volatility model with a time-varying unconditional volatility which is a function of macroeconomic information. It is an extension of the SPLINE GARCH model proposed by Engle and Rangel (2005). The advantage of the model proposed in this paper is that the macroeconomic information available (and/or forecasts)is used in the parameter estimation process. Based on an application of this model to S&P500 share index returns, it is demonstrated that forecasts of macroeconomic variables can be easily incorporated into volatility forecasts for share index returns. It transpires that the model proposed here can lead to significantly improved volatility forecasts compared to traditional GARCH type volatility models.
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Bibliographic InfoPaper provided by National Centre for Econometric Research in its series NCER Working Paper Series with number 18.
Date of creation: 14 Jun 2007
Date of revision:
Volatility; macroeconomic data; forecast; spline; GARCH.;
Find related papers by JEL classification:
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- G00 - Financial Economics - - General - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-06-23 (All new papers)
- NEP-ECM-2007-06-23 (Econometrics)
- NEP-ETS-2007-06-23 (Econometric Time Series)
- NEP-FOR-2007-06-23 (Forecasting)
- NEP-MAC-2007-06-23 (Macroeconomics)
- NEP-RMG-2007-06-23 (Risk Management)
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