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The effect of uncertainty on stock market volatility and correlation

Asgharian, Hossein LU ; Christiansen, Charlotte LU and HOU, Ai Jun LU (2023) In Journal of Banking and Finance 154.
Abstract
In this study, we use an extension of the heterogeneous autoregressive model to investigate the influence of time-varying risk aversion and macroeconomic, financial, and economic policy uncertainty measures on stock market volatility and correlation. Based on the findings, there is a stronger predictive ability of these variables at the monthly frequency than at the daily frequency. We also highlight the importance of risk aversion, which, alongside fundamental factors, reflects investor sentiment in predicting stock market volatility. Meanwhile, although uncertainty variables, such as economic uncertainty and financial uncertainty, are important, the widely used variable, economic policy uncertainty, is not helpful for predicting stock... (More)
In this study, we use an extension of the heterogeneous autoregressive model to investigate the influence of time-varying risk aversion and macroeconomic, financial, and economic policy uncertainty measures on stock market volatility and correlation. Based on the findings, there is a stronger predictive ability of these variables at the monthly frequency than at the daily frequency. We also highlight the importance of risk aversion, which, alongside fundamental factors, reflects investor sentiment in predicting stock market volatility. Meanwhile, although uncertainty variables, such as economic uncertainty and financial uncertainty, are important, the widely used variable, economic policy uncertainty, is not helpful for predicting stock market volatility. Moreover, there is evidence of higher economic value and reduced portfolio risk when including risk aversion and economic uncertainty in international portfolio analysis. (Less)
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author
; and
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
Economic uncertainty, HAR model, International portfolio analysis, Stock market correlation, Stock market volatility
in
Journal of Banking and Finance
volume
154
article number
106929
publisher
Elsevier
external identifiers
  • scopus:85162031550
ISSN
1872-6372
DOI
10.1016/j.jbankfin.2023.106929
language
English
LU publication?
yes
id
b1a21fe0-4c02-42bf-b9df-f5e9696c61fd
date added to LUP
2023-05-20 09:59:17
date last changed
2023-09-04 15:21:34
@article{b1a21fe0-4c02-42bf-b9df-f5e9696c61fd,
  abstract     = {{In this study, we use an extension of the heterogeneous autoregressive model to investigate the influence of time-varying risk aversion and macroeconomic, financial, and economic policy uncertainty measures on stock market volatility and correlation. Based on the findings, there is a stronger predictive ability of these variables at the monthly frequency than at the daily frequency. We also highlight the importance of risk aversion, which, alongside fundamental factors, reflects investor sentiment in predicting stock market volatility. Meanwhile, although uncertainty variables, such as economic uncertainty and financial uncertainty, are important, the widely used variable, economic policy uncertainty, is not helpful for predicting stock market volatility. Moreover, there is evidence of higher economic value and reduced portfolio risk when including risk aversion and economic uncertainty in international portfolio analysis.}},
  author       = {{Asgharian, Hossein and Christiansen, Charlotte and HOU, Ai Jun}},
  issn         = {{1872-6372}},
  keywords     = {{Economic uncertainty; HAR model; International portfolio analysis; Stock market correlation; Stock market volatility}},
  language     = {{eng}},
  publisher    = {{Elsevier}},
  series       = {{Journal of Banking and Finance}},
  title        = {{The effect of uncertainty on stock market volatility and correlation}},
  url          = {{http://dx.doi.org/10.1016/j.jbankfin.2023.106929}},
  doi          = {{10.1016/j.jbankfin.2023.106929}},
  volume       = {{154}},
  year         = {{2023}},
}