Technological Shocks and Stock Market Volatility Over a Century: A GARCH-MIDAS Approach

Afees Salisu, Riza Demirer and Rangan Gupta

No 202308, Working Papers from University of Pretoria, Department of Economics

Abstract: This paper provides a novel perspective to the innovation-stock market nexus by examining the predictive relationship between technological shocks and stock market volatility using data over a period of more than 140 years. Utilizing annual patent data for the U.S. and a large set of economies to create proxies for local and global technological shocks and a mixed-sampling data (MIDAS) framework, we present robust evidence that technological shocks capture significant predictive information regarding future realizations of stock market volatility, both in- and out-of-sample and at both the short and long forecast horizons. Further economic analysis shows that investment portfolios created by the volatility forecasts obtained from the forecasting models that incorporate technological shocks as predictors in volatility models experience significantly lower return volatility in the out-of-sample horizons, which in turn helps to improve the risk-return profile of those portfolios. Our findings present a novel take on the nexus between technological innovations and stock market dynamics and paves the way for several interesting avenues for future research regarding the role of technological innovations on asset pricing tests and portfolio models.

Keywords: Patents; Technology shocks; Stock market volatility; Forecasting (search for similar items in EconPapers)
JEL-codes: C32 C53 E37 G15 O33 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2023-04
New Economics Papers: this item is included in nep-fdg, nep-fmk, nep-his and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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