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Macro-Financial Linkages in the High-Frequency Domain: The Effects of Uncertainty on Realized Volatility

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  • Guglielmo Maria Caporale
  • Menelaos Karanasos
  • Stavroula Yfanti

Abstract

This paper estimates a bivariate HEAVY system including daily and intra-daily volatility equations and its macro-augmented asymmetric power extension. It focuses on economic factors that exacerbate stock market volatility and represent major threats to financial stability. In particular, it extends the HEAVY framework with powers, leverage, and macro effects that improve its forecasting accuracy significantly. Higher uncertainty is found to increase the leverage and macro effects from credit and commodity markets on stock market realized volatility. Specifically, Economic Policy Uncertainty is shown to be one of the main drivers of US and UK financial volatility alongside global credit and commodity factors.

Suggested Citation

  • Guglielmo Maria Caporale & Menelaos Karanasos & Stavroula Yfanti, 2019. "Macro-Financial Linkages in the High-Frequency Domain: The Effects of Uncertainty on Realized Volatility," CESifo Working Paper Series 8000, CESifo.
    • Handle: RePEc:ces:ceswps:_8000
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    3. Fatemeh Salimi, 2020. "Exchange Rates, Stock Prices, and Stock Market Uncertainty," Working Papers halshs-03007904, HAL.

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    Keywords

    asymmetries; economic policy uncertainty; HEAVY model; high-frequency data; macro-financial linkages; power transformations; realized variance; risk management;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    NEP fields

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