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Anticipating Long‐Term Stock Market Volatility

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  • Christian Conrad
  • Karin Loch

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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Suggested Citation

  • Christian Conrad & Karin Loch, 2015. "Anticipating Long‐Term Stock Market Volatility," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 30(7), pages 1090-1114, November.
    • Handle: RePEc:wly:japmet:v:30:y:2015:i:7:p:1090-1114
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    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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