Abstract

http://ssrn.com/abstract=1737433
 
 

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A Comprehensive Look at Financial Volatility Prediction by Economic Variables


Charlotte Christiansen


Aarhus University - CREATES

Maik Schmeling


City University London - Sir John Cass Business School

Andreas Schrimpf


Bank for International Settlements (BIS) - Monetary and Economic Department

January 8, 2011


Abstract:     
We investigate if asset return volatility is predictable by macroeconomic and financial variables and shed light on the economic drivers of financial volatility. Our approach is distinct due to its comprehensiveness: First, we employ a data-rich forecast methodology to handle a large set of potential predictors in a Bayesian Model Averaging approach, and, second, we take a look at multiple asset classes (equities, foreign exchange, bonds, and commodities) over long time spans. We find that proxies for credit risk and funding (il)liquidity consistently show up as common predictors of volatility across asset classes. Variables capturing time-varying risk premia also perform well as predictors of volatility. While forecasts by macro-finance augmented models also achieve forecasting gains out-of-sample relative to autoregressive benchmarks, the performance varies across asset classes and over time.

Number of Pages in PDF File: 45

Keywords: Realized volatility, Forecasting, Data-rich modeling, Bayesian model averaging, Model uncertainty

JEL Classification: G12, G15, G17, C53

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Date posted: January 10, 2011 ; Last revised: March 6, 2012

Suggested Citation

Christiansen, Charlotte and Schmeling, Maik and Schrimpf, Andreas, A Comprehensive Look at Financial Volatility Prediction by Economic Variables (January 8, 2011). Available at SSRN: http://ssrn.com/abstract=1737433 or http://dx.doi.org/10.2139/ssrn.1737433

Contact Information

Charlotte Christiansen (Contact Author)
Aarhus University - CREATES ( email )
Fuglesangs Alle 4
Aarhus V, DK 8210
Denmark
Maik Schmeling
City University London - Sir John Cass Business School ( email )
106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
Andreas Schrimpf
Bank for International Settlements (BIS) - Monetary and Economic Department ( email )
Centralbahnplatz 2
CH-4002 Basel
Switzerland
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