Forecasting Gold Volatility in an Uncertain Environment: The Roles of Large and Small Shock Sizes

In a complex and volatile macroeconomic environment, precious metals, which have the functions of preservation, appreciation, and hedging, play an important role in investment risk management. Therefore, this study adopts the extended GARCH‐MIDAS model to investigate the underlying connection between gold price volatility and different uncertain shocks. In this paper, we consider five uncertainty indicators and then decompose them into different states to capture their shock sizes. Next, we introduce uncertainty shocks into the MIDAS structure to test whether they contain relevant and valid information about gold price volatility forecasts. Specifically, parameter significance suggests a positive association between uncertain indicators and gold price volatility, but variability in the influence of their shock sizes on gold price volatility. Out‐of‐sample results present that the extended model that includes asymmetric shock sizes outperforms other competitive models. Besides, the model that includes large shock sizes exhibits better predictive performance than the model that includes small shocks. Finally, based on the empirical analyses, this paper provides new insights for the gold industry, futures exchanges, government regulators, and investors engaged in futures hedging to achieve risk control and financial stability in response to uncertain shocks.