Global financial stress index and long-term volatility forecast for international stock markets

Chao Liang, Qin Luo, Yan Li and Luu Duc Toan Huynh

Journal of International Financial Markets, Institutions and Money, 2023, vol. 88, issue C

Abstract: In this study, we examine the long-term predictive role of the global financial stress index (GFSI) on equity market volatility and provide a comprehensive analysis using GFSI for the realized volatilities of 21 international stock indices. By focusing on the out-of-sample analysis, we show that GFSI has strong predictive information in forecasting the long-term realized volatilities for most of these equity indices, and it performs better than the Chicago Board Options Exchange volatility index (VIX), the United States economic policy uncertainty (USEPU), global economic policy uncertainty (GEPU), and geopolitical risk (GPR). In terms of the predictive performance during the COVID-19 pandemic, we further show the significantly effective role of GFSI for the long-term realized volatilities of equity markets. In dealing with the high-level global financial stress, our study helps policymakers from many countries to prevent large market fluctuations and decrease economic damage, and facilitate market participants to form better risk-aversion investment strategies.

Keywords: COVID-19; Global financial stress index; VIX; EPU; Volatility forecast (search for similar items in EconPapers)
JEL-codes: C22 C53 C58 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:88:y:2023:i:c:s1042443123000938

DOI: 10.1016/j.intfin.2023.101825

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