Anticipating Long-Term Stock Market Volatility

Journal of Applied Econometrics, Forthcoming

35 Pages Posted: 2 Oct 2012 Last revised: 30 Apr 2014

See all articles by Christian Conrad

Christian Conrad

Heidelberg University - Alfred Weber Institute for Economics; ETH Zürich - KOF Swiss Economic Institute

Karin Loch

Heidelberg University - Faculty of Economics and Social Studies

Date Written: April 23, 2014

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 show that macroeconomic variables are important determinants of the secular component of 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 long-term stock market volatility. While the term spread and housing starts are leading variables with respect to stock market volatility, for industrial production and the unemployment rate expectations data from the Survey of Professional Forecasters regarding the future development are most informative.

Keywords: Volatility Components, GARCH-MIDAS, Survey Data, Macro Finance Link

JEL Classification: C53, C58, E32, G12

Suggested Citation

Conrad, Christian and Loch, Karin, Anticipating Long-Term Stock Market Volatility (April 23, 2014). Journal of Applied Econometrics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2154882 or http://dx.doi.org/10.2139/ssrn.2154882

Christian Conrad (Contact Author)

Heidelberg University - Alfred Weber Institute for Economics ( email )

Grabengasse 14
Heidelberg, D-69117
Germany
+49 (06)221 543173 (Phone)

HOME PAGE: http://www.uni-heidelberg.de/conrad

ETH Zürich - KOF Swiss Economic Institute ( email )

Zurich
Switzerland

Karin Loch

Heidelberg University - Faculty of Economics and Social Studies ( email )

Bergheimer Str. 58
Heidelberg, D-69115
Germany

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