Forecasting stock market volatility with regime-switching GARCH-MIDAS: The role of geopolitical risks

Mawuli Segnon, Rangan Gupta and Bernd Wilfling

International Journal of Forecasting, 2024, vol. 40, issue 1, 29-43

Abstract: We investigate the role of geopolitical risks in forecasting stock market volatility at monthly horizons within a robust autoregressive Markov-switching GARCH mixed-data-sampling (AR-MSGARCH-MIDAS) framework. Our approach accounts for structural breaks through regime switching and allows us to disentangle short- and long-run volatility components. We conduct an empirical out-of-sample forecasting analysis using (i) daily Dow Jones Industrial Average returns, and (ii) monthly sampled geopolitical risks and macroeconomic variables over a time span of 122 years. We find that the impact of geopolitical risks as explanatory variables for stock market volatility forecasts at monthly horizons hinges crucially on the specific prediction model chosen by the forecaster. After capturing the non-stationarities in the data via an MSGARCH framework, we do not find significant forecast accuracy improvements through the inclusion of geopolitical risk indices.

Keywords: Geopolitical risks; Volatility forecasts; Markov-switching GARCH-MIDAS; EPA tests; Model confidence sets (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (7)

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Working Paper: Forecasting Stock Market Volatility with Regime-Switching GARCH-MIDAS: The Role of Geopolitical Risks (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfor:v:40:y:2024:i:1:p:29-43

DOI: 10.1016/j.ijforecast.2022.11.007

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