Forecasting Stock Market (Realized) Volatility in the United Kingdom: Is There a Role for Economic Inequality?

Hossein Hassani (), Mohammad Yeganegi (), Rangan Gupta and Riza Demirer
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Hossein Hassani: The Statistical Research Centre, Bournemouth University, Bournemouth, UK
Mohammad Yeganegi: Department of Accounting, Islamic Azad University Central Tehran Branch, Iran

No 201880, Working Papers from University of Pretoria, Department of Economics

Abstract: This paper explores the potential role of economic inequality for forecasting the stock market volatility of the United Kingdom (UK). Utilizing linear and nonlinear models as well as measures of consumption and income inequalities over the period of 1975 to 2016, we find that linear models incorporating the information of growth in inequality indeed produce lower forecast errors. These models, however, do not necessarily outperform the univariate linear and nonlinear models based on formal statistical forecast comparison tests, especially in short- to medium-runs. On the other hand, at a one-year-ahead horizon, absolute measure of consumption inequality results in significant statistical gains for stock market volatility predictions. We argue that the long-run predictive power of consumption inequality is driven by its informational content over both political and social uncertainty in the long-run.

Keywords: Income and Consumption Inequalities; Stock Markets; Realized Volatility; Forecasting; Linear and Nonlinear Models; United Kingdom (search for similar items in EconPapers)
JEL-codes: C22 G1 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2018-11
New Economics Papers: this item is included in nep-fmk, nep-for and nep-his
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Persistent link: https://EconPapers.repec.org/RePEc:pre:wpaper:201880

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