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Which component of air quality index drives stock price volatility in China: a decomposition-based forecasting method

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  • Yu, Jize
  • Zhang, Li
  • Peng, Lijuan
  • Wu, Rui

Abstract

Extreme climate change has greatly damaged society and human beings, which has been verified to affect financial markets. In this paper, we detect the predictive performance of the air quality index (AQI) on stock market volatility under a decomposed GARCH-MIDAS model framework. In addition, considering that weather variables have significant seasonal characteristics, we further investigate which component of the AQI is the most powerful driver of stock volatility, so STL decomposition is adopted to divide the AQI into three sub-sequences. We further construct several extended models. The empirical results show that the model considering the trend component is superior to other competing models.

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  • Yu, Jize & Zhang, Li & Peng, Lijuan & Wu, Rui, 2023. "Which component of air quality index drives stock price volatility in China: a decomposition-based forecasting method," Finance Research Letters, Elsevier, vol. 51(C).
    • Handle: RePEc:eee:finlet:v:51:y:2023:i:c:s1544612322005839
    DOI: 10.1016/j.frl.2022.103406
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    Cited by:

    1. Wu, Xinyu & Zhao, An & Cheng, Tengfei, 2023. "A Real-Time GARCH-MIDAS model," Finance Research Letters, Elsevier, vol. 56(C).

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    More about this item

    Keywords

    Air quality index; Stock prices volatility forecast; STL decomposition; GARCH-MIDAS; JEL classification: C22; G11; G12; G17;
    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
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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