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

Jize Yu, Li Zhang, Lijuan Peng and Rui Wu

Finance Research Letters, 2023, vol. 51, issue C

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.

Keywords: Air quality index; Stock prices volatility forecast; STL decomposition; GARCH-MIDAS; JEL classification: C22; G11; G12; G17 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:51:y:2023:i:c:s1544612322005839

DOI: 10.1016/j.frl.2022.103406

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