Stock Market Volatility and Macroeconomic Fundamentals

Robert Engle, Eric Ghysels and Bumjean Sohn
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Eric Ghysels: University of North Carolina at Chapel Hill
Bumjean Sohn: Korea University Business School

The Review of Economics and Statistics, 2013, vol. 95, issue 3, 776-797

Abstract: We revisit the relation between stock market volatility and macroeconomic activity using a new class of component models that distinguish short-run from long-run movements. We formulate models with the long-term component driven by inflation and industrial production growth that are in terms of pseudo out-of-sample prediction for horizons of one quarter at par or outperform more traditional time series volatility models at longer horizons. Hence, imputing economic fundamentals into volatility models pays off in terms of long-horizon forecasting. We also find that macroeconomic fundamentals play a significant role even at short horizons. © 2013 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Keywords: stock market volatility; macroeconomic activity (search for similar items in EconPapers)
JEL-codes: C53 C58 E44 G10 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (560)

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