Flight to Safety: Does It Matter for Volatility Forecasting?

63 Pages Posted: 9 Mar 2018

Date Written: September 30, 2016

Abstract

We propose the use of a risk measure built on flight-to-safety (FTS) episodes into a volatility forecasting model. We assign to each day in the sample a probability of being a FTS day after observing (ab)normal movements in the US equity, US bond and gold markets. By allowing each FTS day to be an indicator of higher future volatility, we document statistically significant improvements in the accuracy of the 1-day ahead forecasts for the realized variance of the S&P 500 equity index. Superior model performance is found over some of the most common volatility forecasting models proposed in the literature that do not specifically account for these, generally short-lived, market stress episodes.

Keywords: Flight to safety, safe haven, gold, realized variance, volatility forecasting.

JEL Classification: C22, C53, C58, G17

Suggested Citation

Ruzzi, Dario, Flight to Safety: Does It Matter for Volatility Forecasting? (September 30, 2016). Available at SSRN: https://ssrn.com/abstract=3134374 or http://dx.doi.org/10.2139/ssrn.3134374

Dario Ruzzi (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
35
Abstract Views
241
PlumX Metrics