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Stock market volatility and jumps in times of uncertainty

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  • Megaritis, Anastasios
  • Vlastakis, Nikolaos
  • Triantafyllou, Athanasios

Abstract

In this paper we examine the predictive power of latent macroeconomic uncertainty on US stock market volatility and jump tail risk. We find that increasing macroeconomic uncertainty predicts a subsequent rise in volatility and price jumps in the US equity market. Our analysis shows that the latent macroeconomic uncertainty measure of Jurado et al. (2015) has the most significant and long-lasting impact on US stock market volatility and jumps in the equity market when compared to the respective impact of the VIX and other popular observable uncertainty proxies. Our study is the first to show that the latent macroeconomic uncertainty factor outperforms the VIX when forecasting volatility and jumps after the 2007 US Great Recession. We additionally find that latent macroeconomic uncertainty is a common forecasting factor of volatility and jumps of the intraday returns of S&P 500 constituents and has higher predictive power on the volatility and jumps of the equities which belong to the financial sector. Overall, our empirical analysis shows that stock market volatility is significantly affected by the rising degree of unpredictability in the macroeconomy, while it is relatively immune to shocks in observable uncertainty proxies.

Suggested Citation

  • Megaritis, Anastasios & Vlastakis, Nikolaos & Triantafyllou, Athanasios, 2020. "Stock market volatility and jumps in times of uncertainty," Essex Finance Centre Working Papers 29200, University of Essex, Essex Business School.
  • Handle: RePEc:esy:uefcwp:29200
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    More about this item

    Keywords

    Jumps; Bipower variation; Realized volatility; Macroeconomic Uncertainty;
    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
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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