A Comprehensive Look at Financial Volatility Prediction by Economic Variables

45 Pages Posted: 10 Jan 2011 Last revised: 6 Mar 2012

See all articles by Charlotte Christiansen

Charlotte Christiansen

Aarhus University - CREATES

Maik Schmeling

Goethe University Frankfurt - Department of Finance; Centre for Economic Policy Research (CEPR)

Andreas Schrimpf

Bank for International Settlements (BIS) - Monetary and Economic Department; Centre for Economic Policy Research (CEPR); University of Tuebingen

Multiple version iconThere are 2 versions of this paper

Date Written: January 8, 2011

Abstract

We investigate if asset return volatility is predictable by macroeconomic and financial variables and shed light on the economic drivers of financial volatility. Our approach is distinct due to its comprehensiveness: First, we employ a data-rich forecast methodology to handle a large set of potential predictors in a Bayesian Model Averaging approach, and, second, we take a look at multiple asset classes (equities, foreign exchange, bonds, and commodities) over long time spans. We find that proxies for credit risk and funding (il)liquidity consistently show up as common predictors of volatility across asset classes. Variables capturing time-varying risk premia also perform well as predictors of volatility. While forecasts by macro-finance augmented models also achieve forecasting gains out-of-sample relative to autoregressive benchmarks, the performance varies across asset classes and over time.

Keywords: Realized volatility, Forecasting, Data-rich modeling, Bayesian model averaging, Model uncertainty

JEL Classification: G12, G15, G17, C53

Suggested Citation

Christiansen, Charlotte and Schmeling, Maik and Schrimpf, Andreas, A Comprehensive Look at Financial Volatility Prediction by Economic Variables (January 8, 2011). Available at SSRN: https://ssrn.com/abstract=1737433 or http://dx.doi.org/10.2139/ssrn.1737433

Charlotte Christiansen (Contact Author)

Aarhus University - CREATES ( email )

Fuglesangs Alle 4
Aarhus V, DK 8210
Denmark

Maik Schmeling

Goethe University Frankfurt - Department of Finance ( email )

House of Finance
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60323
Germany

HOME PAGE: http://sites.google.com/site/maikschmeling/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Andreas Schrimpf

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

University of Tuebingen ( email )

Wilhelmstr. 19
72074 Tuebingen, Baden Wuerttemberg 72074
Germany

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