Forecasting stock market volatility conditional on macroeconomic conditions

Ralf Becker and Adam Clements

No 18, NCER Working Paper Series from National Centre for Econometric Research

Abstract: This paper presents a GARCH type volatility model with a time-varying unconditional volatility which is a function of macroeconomic information. It is an extension of the SPLINE GARCH model proposed by Engle and Rangel (2005). The advantage of the model proposed in this paper is that the macroeconomic information available (and/or forecasts)is used in the parameter estimation process. Based on an application of this model to S&P500 share index returns, it is demonstrated that forecasts of macroeconomic variables can be easily incorporated into volatility forecasts for share index returns. It transpires that the model proposed here can lead to significantly improved volatility forecasts compared to traditional GARCH type volatility models.

Keywords: Volatility; macroeconomic data; forecast; spline; GARCH. (search for similar items in EconPapers)
JEL-codes: C12 C22 G00 (search for similar items in EconPapers)
Pages: 33
Date: 2007-06-14
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-for, nep-mac and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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