IDEAS home Printed from https://ideas.repec.org/a/eee/finlet/v59y2024ics1544612323011832.html
   My bibliography  Save this article

Forecasting US Stock Market Volatility: Evidence from ESG and CPU indices

Author

Listed:
  • Ghani, Usman
  • Zhu, Bo
  • Qin, Quande
  • Ghani, Maria

Abstract

This study investigates the predictability of U.S. stock market volatility using environmental, social, and governance (ESG) and climate policy uncertainty (CPU) indices based on the Markov-regime GARCH-MIDAS model. Our out-of-sample results show that ESG and CPU information is useful to forecast the U.S. stock market volatility. Notably, the ESG index proved to be a more powerful predictor for volatility estimation. Lastly, we ensure the reliability of the study's results through various robustness checks, including the model confidence set (MCS) method. These results suggest that investors and policymakers should consider carefully the impact of ESG and CPU risk on financial decision making and policy realms.

Suggested Citation

  • Ghani, Usman & Zhu, Bo & Qin, Quande & Ghani, Maria, 2024. "Forecasting US Stock Market Volatility: Evidence from ESG and CPU indices," Finance Research Letters, Elsevier, vol. 59(C).
    • Handle: RePEc:eee:finlet:v:59:y:2024:i:c:s1544612323011832
    DOI: 10.1016/j.frl.2023.104811
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1544612323011832
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.frl.2023.104811?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Asgharian, Hossein & Christiansen, Charlotte & Hou, Ai Jun, 2015. "Effects of macroeconomic uncertainty on the stock and bond markets," Finance Research Letters, Elsevier, vol. 13(C), pages 10-16.
    2. Degiannakis, Stavros & Filis, George & Panagiotakopoulou, Sofia, 2018. "Oil price shocks and uncertainty: How stable is their relationship over time?," Economic Modelling, Elsevier, vol. 72(C), pages 42-53.
    3. Dutta, Anupam & Bouri, Elie & Rothovius, Timo & Uddin, Gazi Salah, 2023. "Climate risk and green investments: New evidence," Energy, Elsevier, vol. 265(C).
    4. Tumala, Mohammed M. & Salisu, Afees & Nmadu, Yaaba B., 2023. "Climate change and fossil fuel prices: A GARCH-MIDAS analysis," Energy Economics, Elsevier, vol. 124(C).
    5. Chen, Yu & Lin, Boqiang, 2022. "Quantifying the extreme spillovers on worldwide ESG leaders' equity," International Review of Financial Analysis, Elsevier, vol. 84(C).
    6. Wang, Lu & Wu, Jiangbin & Cao, Yang & Hong, Yanran, 2022. "Forecasting renewable energy stock volatility using short and long-term Markov switching GARCH-MIDAS models: Either, neither or both?," Energy Economics, Elsevier, vol. 111(C).
    7. Liang, Chao & Umar, Muhammad & Ma, Feng & Huynh, Toan L.D., 2022. "Climate policy uncertainty and world renewable energy index volatility forecasting," Technological Forecasting and Social Change, Elsevier, vol. 182(C).
    8. Lu, Xinjie & Ma, Feng & Wang, Jiqian & Zhu, Bo, 2021. "Oil shocks and stock market volatility: New evidence," Energy Economics, Elsevier, vol. 103(C).
    9. Pan, Zhiyuan & Wang, Yudong & Wu, Chongfeng & Yin, Libo, 2017. "Oil price volatility and macroeconomic fundamentals: A regime switching GARCH-MIDAS model," Journal of Empirical Finance, Elsevier, vol. 43(C), pages 130-142.
    10. Tian, Hao & Long, Shaobo & Li, Zixuan, 2022. "Asymmetric effects of climate policy uncertainty, infectious diseases-related uncertainty, crude oil volatility, and geopolitical risks on green bond prices," Finance Research Letters, Elsevier, vol. 48(C).
    11. Bouri, Elie & Iqbal, Najaf & Klein, Tony, 2022. "Climate policy uncertainty and the price dynamics of green and brown energy stocks," Finance Research Letters, Elsevier, vol. 47(PB).
    12. Arthur A. Benthem & Edmund Crooks & Stefano Giglio & Eugenie Schwob & Johannes Stroebel, 2022. "The effect of climate risks on the interactions between financial markets and energy companies," Nature Energy, Nature, vol. 7(8), pages 690-697, August.
    13. Lang, Qiaoqi & Lu, Xinjie & Ma, Feng & Huang, Dengshi, 2022. "Oil futures volatility predictability: Evidence based on Twitter-based uncertainty," Finance Research Letters, Elsevier, vol. 47(PA).
    14. Guesmi, Khaled & Makrychoriti, Panagiota & Spyrou, Spyros, 2023. "The relationship between climate risk, climate policy uncertainty, and CO2 emissions: Empirical evidence from the US," Journal of Economic Behavior & Organization, Elsevier, vol. 212(C), pages 610-628.
    15. Venturini, Alessio, 2022. "Climate change, risk factors and stock returns: A review of the literature," International Review of Financial Analysis, Elsevier, vol. 79(C).
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Zhang, Jiaming & Xiang, Yitian & Zou, Yang & Guo, Songlin, 2024. "Volatility forecasting of Chinese energy market: Which uncertainty have better performance?," International Review of Financial Analysis, Elsevier, vol. 91(C).
    2. Ghani, Maria & Guo, Qiang & Ma, Feng & Li, Tao, 2022. "Forecasting Pakistan stock market volatility: Evidence from economic variables and the uncertainty index," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 1180-1189.
    3. Raza, Syed Ali & Khan, Komal Akram & Benkraiem, Ramzi & Guesmi, Khaled, 2024. "The importance of climate policy uncertainty in forecasting the green, clean and sustainable financial markets volatility," International Review of Financial Analysis, Elsevier, vol. 91(C).
    4. Khalfaoui, Rabeh & Mefteh-Wali, Salma & Viviani, Jean-Laurent & Ben Jabeur, Sami & Abedin, Mohammad Zoynul & Lucey, Brian M., 2022. "How do climate risk and clean energy spillovers, and uncertainty affect U.S. stock markets?," Technological Forecasting and Social Change, Elsevier, vol. 185(C).
    5. Guesmi, Khaled & Makrychoriti, Panagiota & Spyrou, Spyros, 2023. "The relationship between climate risk, climate policy uncertainty, and CO2 emissions: Empirical evidence from the US," Journal of Economic Behavior & Organization, Elsevier, vol. 212(C), pages 610-628.
    6. Zhang, Zhihao, 2023. "Are climate risks helpful for understanding inflation in BRICS countries?," Finance Research Letters, Elsevier, vol. 58(PB).
    7. Liu, Guangqiang & Guo, Xiaozhu, 2022. "Forecasting stock market volatility using commodity futures volatility information," Resources Policy, Elsevier, vol. 75(C).
    8. Ongsakul, Viput & Papangkorn, Suwongrat & Jiraporn, Pornsit, 2023. "Estimating the effect of climate change exposure on firm value using climate policy uncertainty: A text-based approach," Journal of Behavioral and Experimental Finance, Elsevier, vol. 40(C).
    9. Huo, Dongxia & Bagadeem, Salim & Elsherazy, Tarek Abbas & Nasnodkar, Siddhesh Prabhu & Kalra, Akash, 2023. "Renewable energy consumption and the rising effect of climate policy uncertainty: Fresh policy analysis from China," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 1459-1474.
    10. Chen, Zhonglu & Zhang, Li & Weng, Chen, 2023. "Does climate policy uncertainty affect Chinese stock market volatility?," International Review of Economics & Finance, Elsevier, vol. 84(C), pages 369-381.
    11. Bonato, Matteo & Çepni, Oğuzhan & Gupta, Rangan & Pierdzioch, Christian, 2021. "Do oil-price shocks predict the realized variance of U.S. REITs?," Energy Economics, Elsevier, vol. 104(C).
    12. Mengting Fan & Zan Mo & Huijian Fu & Tsung-Hsien Wu & Zili Chen & Yue He, 2024. "Does climate policy uncertainty matter for bank value?," Economic Change and Restructuring, Springer, vol. 57(2), pages 1-28, April.
    13. Çepni, Oğuzhan & Gupta, Rangan & Pienaar, Daniel & Pierdzioch, Christian, 2022. "Forecasting the realized variance of oil-price returns using machine learning: Is there a role for U.S. state-level uncertainty?," Energy Economics, Elsevier, vol. 114(C).
    14. Addey, Kwame Asiam & Nganje, William, 2024. "Climate policy volatility hinders renewable energy consumption: Evidence from yardstick competition theory," Energy Economics, Elsevier, vol. 130(C).
    15. Demirer, Riza & Gupta, Rangan & Pierdzioch, Christian & Shahzad, Syed Jawad Hussain, 2020. "The predictive power of oil price shocks on realized volatility of oil: A note," Resources Policy, Elsevier, vol. 69(C).
    16. Haohua Li & Elie Bouri & Rangan Gupta & Libing Fang, 2023. "Return Volatility, Correlation, and Hedging of Green and Brown Stocks: Is there a Role for Climate Risk Factors?," Working Papers 202301, University of Pretoria, Department of Economics.
    17. Ghosh, Indranil & Jana, Rabin K., 2024. "Clean energy stock price forecasting and response to macroeconomic variables: A novel framework using Facebook's Prophet, NeuralProphet and explainable AI," Technological Forecasting and Social Change, Elsevier, vol. 200(C).
    18. Su, Zhi & Fang, Tong & Yin, Libo, 2019. "Understanding stock market volatility: What is the role of U.S. uncertainty?," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 582-590.
    19. Xu, Yongan & Li, Ming & Yan, Wen & Bai, Jiancheng, 2022. "Predictability of the renewable energy market returns: The informational gains from the climate policy uncertainty," Resources Policy, Elsevier, vol. 79(C).
    20. Chen, Zhonglu & Liang, Chao & Umar, Muhammad, 2021. "Is investor sentiment stronger than VIX and uncertainty indices in predicting energy volatility?," Resources Policy, Elsevier, vol. 74(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finlet:v:59:y:2024:i:c:s1544612323011832. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/frl .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.