The Importance of the Macroeconomic Variables in Forecasting Stock Return Variance: A GARCH-MIDAS Approach

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Abstract

This paper applies the GARCH-MIDAS (mixed data sampling) model to examine whether information contained in macroeconomic variables can help to predict short-term and long-term components of the return variance. A principal component analysis is used to incorporate the information contained in different variables. Our results show that including low-frequency macroeconomic information in the GARCH-MIDAS model improves the prediction ability of the model, particularly for the long-term variance component. Moreover, the GARCH-MIDAS model augmented with the first principal component outperforms all other specifications, indicating that the constructed principal component can be considered as a good proxy of the business cycle. Copyright (c) 2013 John Wiley & Sons, Ltd.

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Research areas and keywords

Subject classification (UKÄ) – MANDATORY

  • Probability Theory and Statistics
  • Economics

Keywords

  • Mixed data sampling, long-term variance component, macroeconomic, variables, principal component, variance prediction
Original languageEnglish
Pages (from-to)600-612
JournalJournal of Forecasting
Volume32
Issue number7
Publication statusPublished - 2013
Publication categoryResearch
Peer-reviewedYes