Forecasting Stock Market Volatility with Regime-Switching GARCH-MIDAS: The Role of Geopolitical Risks

Mawuli Segnon, Rangan Gupta and Bernd Wilfling
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Mawuli Segnon: Department of Economics, Institute for Econometric and Economic Statistics and Chair of Empirical Economics, University of Munster, Germany

No 202203, Working Papers from University of Pretoria, Department of Economics

Abstract: We investigate the role of geopolitical risks (GPR) in forecasting stock market volatility in a robust autoregressive Markov-switching GARCH mixed data sampling (ARMSGARCH-MIDAS) framework that accounts for structural breaks through regime switching and allows us to disentangle short- and long-run volatility components driven by geopolitical risks. An empirical out-of-sample forecasting exercise is conducted using unique data sets on Dow Jones Industrial Average (DJIA) index and geopolitical risks that cover the time period from January 3, 1899 to December 31, 2020. We find that geopolitical risks as explanatory variables can help to improve the accuracy of stock market volatility forecasts. Furthermore, our empirical results show that the macroeconomic variables such as output measured by recessions, inflation and interest rates contain information that is complementary to the one included in the geopolitical risks.

Keywords: Geopolitical risks; Volatility forecasts; Markov-switching GARCH-MIDAS (search for similar items in EconPapers)
JEL-codes: C52 C53 C58 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2022-01
New Economics Papers: this item is included in nep-cwa, nep-ets, nep-fmk, nep-for, nep-ore and nep-rmg
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Journal Article: Forecasting stock market volatility with regime-switching GARCH-MIDAS: The role of geopolitical risks (2024)
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