 Forecasting stock market volatility: Can the risk aversion measure exert an important role?Zhifeng Dai and Xiaoming Chang The North American Journal of Economics and Finance, 2021, vol. 58, issue C Abstract: In this paper, we predict realized volatility of stock return by utilizing time-varying risk aversion based on a simple linear autoregressive model. Our in-sample results suggest that time-varying risk aversion have significant impact for stock return volatility. In terms of out-of-sample forecasting performance, the empirical results indicate that the incorporation of time-varying risk aversion in the benchmark model can yield more accurate stock return volatility forecasts. Notably, the out-of-sample forecasting results confirm that our conclusions are robust when we apply alternative lag orders and alternative prediction evaluation periods. Finally, we study links between the prediction ability of time-varying risk aversion and the volatility of other stock indices and two kinds of crude oil, and find that the new predictor can effectively strengthen forecasting performance in most case. In view of the importance of volatility risk in the asset pricing process, our research is of great significance for financial asset participants. Keywords: Realized volatility; Time-varying risk aversion; Out-of-sample forecast; Asset pricing (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:58:y:2021:i:c:s1062940821001297 DOI: 10.1016/j.najef.2021.101510 Access Statistics for this article The North American Journal of Economics and Finance is currently edited by Hamid Beladi More articles in The North American Journal of Economics and Finance from Elsevier |
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