Volatility forecasting: Global economic policy uncertainty and regime switching

In this study, I explore the impacts of global economic policy uncertainty on futures aggregate monthly volatility and introduce the regime switching in forecasting models, and analyze the predictive ability. In-sample empirical results show that the GEPU index has a significant impact on one-ahead-step volatility of US stock market. Additionally, the GEPU performs much bigger role on future RV in high volatility regime period than during low volatility regime. The out-of-sample results indicate that the GEPU index can indeed increase the forecasts accuracy, especially introducing the regime switching to the forecasting model. Importantly, the robust test is consistent with the conclusions.