Forecasting global equity market volatilities

Yaojie Zhang, Feng Ma, Yin Liao

Research output: Contribution to journalArticle

6 Citations (Scopus)

Abstract

Motivated by a common belief that the international stock market volatilities are synonymous with information flow, this paper proposes a parsimonious way to combine multiple market information flows and assess whether cross-national volatility flows contain important information content that can improve the accuracy of international volatility forecasting. We concentrate on realized volatilities (RV) derived from the intra-day prices of 22 international stock markets, and employ the heterogeneous autoregressive (HAR) framework, along with two common diffusion indices that are constructed based on the simple mean and first principal component (PC) of the 22 stock market RVs, to forecast future volatilities of each market for 1-day, 1-week, and 1-month ahead. We provide strong evidence that the use of the cross-national information reflected by the simple and parsimonious common indices enhances the predictive accuracy of international volatilities at all forecasting horizons. Alternative volatility measures, estimation window sizes, and forecasting evaluation tests confirm the robustness of our results. Finally, our strategy of constructing common diffusion indices is also feasible for international market jumps.
Original languageEnglish
Pages (from-to)1454-1475
Number of pages22
JournalInternational Journal of Forecasting
Volume36
Issue number4
Early online date13 Apr 2020
DOIs
Publication statusPublished - 1 Oct 2020

Keywords

  • Augmented HAR model
  • Common indices
  • Forecasting
  • Global equity market
  • Realized volatility

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