Deja Vol: Predictive Regressions for Aggregate Stock Market Volatility Using Macroeconomic Variables

Abstract

Aggregate stock return volatility is both persistent and countercyclical. This paper tests whether it is possible to improve volatility forecasts at monthly and quarterly horizons by conditioning on additional macroeconomic variables. I find that several variables related to macroeconomic uncertainty, time-varying expected stock returns, and credit conditions Granger cause volatility. It is more difficult to find evidence that forecasts exploiting macroeconomic variables outperform a univariate benchmark out-of-sample. The most successful approaches involve simple combinations of individual forecasts. Predictive power associated with macroeconomic variables appears to concentrate around the onset of recessions.

Keywords: Conditional Volatility, Realized Volatility, Granger Causality, Forecast Evaluation, Forecast Combination

JEL Classification: G12, C22