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Forecasting Stock Market (Realized) Volatility in the United Kingdom: Is There a Role for Economic Inequality?

Author

Listed:
  • Hossein Hassani

    (The Statistical Research Centre, Bournemouth University, Bournemouth, UK)

  • Mohammad Reza Yeganegi

    (Department of Accounting, Islamic Azad University Central Tehran Branch, Iran)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Pretoria, South Africa)

  • Riza Demirer

    (Department of Economics and Finance, Southern Illinois University Edwardsville, Edwardsville, USA.)

Abstract

This paper explores the potential role of economic inequality for forecasting the stock market volatility of the United Kingdom (UK). Utilizing linear and nonlinear models as well as measures of consumption and income inequalities over the period of 1975 to 2016, we find that linear models incorporating the information of growth in inequality indeed produce lower forecast errors. These models, however, do not necessarily outperform the univariate linear and nonlinear models based on formal statistical forecast comparison tests, especially in short- to medium-runs. On the other hand, at a one-year-ahead horizon, absolute measure of consumption inequality results in significant statistical gains for stock market volatility predictions. We argue that the long-run predictive power of consumption inequality is driven by its informational content over both political and social uncertainty in the long-run.

Suggested Citation

  • Hossein Hassani & Mohammad Reza Yeganegi & Rangan Gupta & Riza Demirer, 2018. "Forecasting Stock Market (Realized) Volatility in the United Kingdom: Is There a Role for Economic Inequality?," Working Papers 201880, University of Pretoria, Department of Economics.
  • Handle: RePEc:pre:wpaper:201880
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Income and Consumption Inequalities; Stock Markets; Realized Volatility; Forecasting; Linear and Nonlinear Models; United Kingdom;
    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
    • G1 - Financial Economics - - General Financial Markets

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