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Anticipating Long-Term Stock Market Volatility

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  • Conrad, Christian
  • Loch, Karin

Abstract

We investigate the relationship between long-term U.S. stock market risks and the macroeconomic environment using a two component GARCH-MIDAS model. Our results provide strong evidence in favor of counter-cyclical behavior of long-term stock market volatility. Among the various macro variables in our dataset the term spread, housing starts, corporate profits and the unemployment rate have the highest predictive ability for stock market volatility . While the term spread and housing starts are leading variables with respect to stock market volatility, for corporate profits and the unemployment rate expectations data from the Survey of Professional Forecasters regarding the future development are most informative. Our results suggest that macro variables carry information on stock market risk beyond that contained in lagged realized volatilities, in particular when it comes to long-term forecasting.

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  • Conrad, Christian & Loch, Karin, 2012. "Anticipating Long-Term Stock Market Volatility," Working Papers 0535, University of Heidelberg, Department of Economics.
  • Handle: RePEc:awi:wpaper:0535
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Conrad, Christian & Stuermer, Karin, 2017. "On the economic determinants of optimal stock-bond portfolios: international evidence," Working Papers 0636, University of Heidelberg, Department of Economics.
    2. Monica Billio & Anna Petronevich, 2017. "Dynamical Interaction Between Financial and Business Cycles," Working Papers 2017:24, Department of Economics, University of Venice "Ca' Foscari".
    3. Hossein Asgharian & Charlotte Christiansen & Ai Jun Hou, 2016. "Macro-Finance Determinants of the Long-Run Stock–Bond Correlation: The DCC-MIDAS Specification," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 14(3), pages 617-642.
    4. Nguyen, Duc Khuong & Walther, Thomas, 2017. "Modeling and forecasting commodity market volatility with long-term economic and financial variables," MPRA Paper 84464, University Library of Munich, Germany, revised Jan 2018.
    5. repec:eee:ecolet:v:157:y:2017:i:c:p:24-27 is not listed on IDEAS
    6. repec:eee:empfin:v:42:y:2017:i:c:p:131-154 is not listed on IDEAS
    7. repec:eee:empfin:v:43:y:2017:i:c:p:130-142 is not listed on IDEAS
    8. Conrad, Christian & Loch, Karin & Rittler, Daniel, 2012. "On the Macroeconomic Determinants of the Long-Term Oil-Stock Correlation," Working Papers 0525, University of Heidelberg, Department of Economics.

    More about this item

    Keywords

    Volatility Components; MIDAS; Survey Data; Macro Finance Link;

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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