The Effect of Uncertainty on Volatility and Correlation

40 Pages Posted: 22 Mar 2018 Last revised: 28 Mar 2022

See all articles by Hossein Asgharian

Hossein Asgharian

Lund University - Department of Economics; Knut Wicksell Centre for Financial Studies

Charlotte Christiansen

Aarhus University - CREATES

Ai Jun Hou

Stockholm University

Date Written: May 6, 2019

Abstract

We use an extension of the heterogeneous autoregressive model to investigate the influence of time-varying risk aversion and a number of macroeconomic, financial, and economic-policy uncertainty measures on stock-return volatility and correlations. Our results indicate strong in-sample and out-of-sample predictive ability of risk aversion and economic uncertainty constructed from financial information for the realized volatility. In contrast, economic-policy uncertainty, the TED spread, the leading indicator, and industrial production do not provide useful information once we account for risk aversion and economic uncertainty. We also provide evidence on the strong forecasting ability and considerable economic value of risk aversion and economic uncertainty for international-portfolio analysis.

Keywords: economic uncertainty; HAR-RV-X model; international-portfolio analysis; stock market correlation; stock market volatility

JEL Classification: C32; G11; G15; G17

Suggested Citation

Asgharian, Hossein and Christiansen, Charlotte and Hou, Ai Jun, The Effect of Uncertainty on Volatility and Correlation (May 6, 2019). Available at SSRN: https://ssrn.com/abstract=3146924 or http://dx.doi.org/10.2139/ssrn.3146924

Hossein Asgharian

Lund University - Department of Economics; Knut Wicksell Centre for Financial Studies ( email )

P.O. Box 7082
S-220 07 Lund
Sweden
046-222-86-87 (Phone)

Charlotte Christiansen (Contact Author)

Aarhus University - CREATES ( email )

Fuglesangs Alle 4
Aarhus V, DK 8210
Denmark

Ai Jun Hou

Stockholm University ( email )

Universitetsvägen 10
Stockholm, Stockholm SE-106 91
Sweden

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