Global economic policy uncertainty and stock volatility: evidence from emerging economies

Xiaoling Yu, Yirong Huang and Kaitian Xiao

Journal of Applied Economics, 2021, vol. 24, issue 1, 416-440

Abstract: We investigate the impact of the global economic policy uncertainty (GEPU) on stock volatility for nine emerging economies (Brazil, Russia, India, China, South Africa, Mexico, Indonesia, South Korea, and Turkey). We employ an expanded GARCH-MIDAS approach to connect low-frequency GEPU data and high-frequency stock data, assuming that GEPU affects stock volatility via the long-run component of total volatility. We not only use DM and SPA tests to statically evaluate the out-of-sample forecasting ability of the extended model, taking traditional GARCH model and GARCH-MIDAS model as benchmarks, but also use the Fluctuation test to examine the time-varyingly relative forecasting performance in the presence of potential instability. From the in-sample estimation results, we find that GEPU has empirically significant impact on stock volatility for the nine emerging economies. The out-of-sample forecasting results show that the GEPU-based model can improve forecasting performance of stock volatility for emerging markets, especially in unstable environments.

Date: 2021
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Citations: View citations in EconPapers (13)

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DOI: 10.1080/15140326.2021.1953913

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