Forecasting the U.S. stock volatility: An aligned jump index from G7 stock markets

We propose new jump indexes that are aligned with the jump information on the G7 stock markets to predict the U.S. stock market volatility. We present several noteworthy findings. First, in-sample tests indicate that the impacts of the aligned jump indexes on one-step-ahead U.S. stock market volatility are significantly negative. Second, the aligned jump index based on the Partial Least Squares (PLS) approach remarkably exhibits a higher predictive power, showing that this new jump index can contain much more predictive information than jump itself or jump index based on the Principal Component Analysis (PCA). Third, the results are consistent across the direction-of-change test and a variety of robustness tests. Consequently, this research provides a new insight and constructs a powerful predictive variable for the U.S. stock market volatility forecasting.