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‘Déjà vol’: Predictive regressions for aggregate stock market volatility using macroeconomic variables

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  • Paye, Bradley S.

Abstract

Aggregate stock return volatility is both persistent and countercyclical. This paper tests whether it is possible to improve volatility forecasts at monthly and quarterly horizons by conditioning on additional macroeconomic variables. I find that several variables related to macroeconomic uncertainty, time-varying expected stock returns, and credit conditions Granger cause volatility. It is more difficult to find evidence that forecasts exploiting macroeconomic variables outperform a univariate benchmark out-of-sample. The most successful approaches involve simple combinations of individual forecasts. Predictive power associated with macroeconomic variables appears to concentrate around the onset of recessions.

Suggested Citation

  • Paye, Bradley S., 2012. "‘Déjà vol’: Predictive regressions for aggregate stock market volatility using macroeconomic variables," Journal of Financial Economics, Elsevier, vol. 106(3), pages 527-546.
  • Handle: RePEc:eee:jfinec:v:106:y:2012:i:3:p:527-546
    DOI: 10.1016/j.jfineco.2012.06.005
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    More about this item

    Keywords

    Conditional volatility; Realized volatility; Granger causality; Forecast evaluation; Forecast combination;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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