Macroeconomic fundamentals, jump dynamics and expected volatility

Zhiyuan Pan, Ruijun Bu, Li Liu and Yudong Wang

Quantitative Finance, 2020, vol. 20, issue 8, 1345-1371

Abstract: In this paper, we develop a new volatility model capturing the effects of macroeconomic variables and jump dynamics on the stock volatility. The proposed GARCH-Jump-MIDAS model is applied to the S&P 500 index. Our in-sample results indicate that macroeconomic activities have important impacts on aggregate market volatility. Out-of-sample evidence suggests that our model with macroeconomic variables significantly outperform a wide range of competitors including the original GARCH(1,1), GARCH-MIDAS and GJR-A-MIDAS models. The volatility timing results also show that the information from jumps and macroeconomic activity is helpful for improving the portfolio performance.

Date: 2020
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Citations: View citations in EconPapers (10)

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DOI: 10.1080/14697688.2020.1736317

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