A Comprehensive Look at Financial Volatility Prediction by Economic Variables

47 Pages Posted: 7 Mar 2012

See all articles by Charlotte Christiansen

Charlotte Christiansen

Aarhus University - CREATES

Maik Schmeling

Goethe University Frankfurt - Department of Finance; Centre for Economic Policy Research (CEPR)

Andreas Schrimpf

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

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2012

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.

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

JEL Classification: G12, G15, G17, C53

Suggested Citation

Christiansen, Charlotte and Schmeling, Maik and Schrimpf, Andreas, A Comprehensive Look at Financial Volatility Prediction by Economic Variables (March 1, 2012). BIS Working Paper No. 374. Available at SSRN: https://ssrn.com/abstract=2016994 or http://dx.doi.org/10.2139/ssrn.2016994

Charlotte Christiansen

Aarhus University - CREATES ( email )

Fuglesangs Alle 4
Aarhus V, DK 8210
Denmark

Maik Schmeling

Goethe University Frankfurt - Department of Finance ( email )

House of Finance
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60323
Germany

HOME PAGE: http://sites.google.com/site/maikschmeling/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Andreas Schrimpf (Contact Author)

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

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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