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Volatility Forecasting Using Geopolitical Risk Indices: A GARCH-MIDAS Approach

Nilsson, Albin LU (2024) NEKP01 20241
Department of Economics
Abstract
This paper applies the GARCH-MIDAS (mixed data sampling) framework to examine if geopolitical risk indices (GPR) have predictive ability when forecasting stock market volatility in advanced economies. Stock market indices and country-specific GPR indices from 21 advanced economies are used to examine the out-of-sample predictability of short-term total variance and long-term variance. The main finding of this paper is that geopolitical risk indices have a predictive ability for stock market volatility in certain advanced economies, but not in all advanced economies. The improvement of forecasting ability is evident for both short-term total variance and long-term variance but is primarily related to long-term variance. The results are of... (More)
This paper applies the GARCH-MIDAS (mixed data sampling) framework to examine if geopolitical risk indices (GPR) have predictive ability when forecasting stock market volatility in advanced economies. Stock market indices and country-specific GPR indices from 21 advanced economies are used to examine the out-of-sample predictability of short-term total variance and long-term variance. The main finding of this paper is that geopolitical risk indices have a predictive ability for stock market volatility in certain advanced economies, but not in all advanced economies. The improvement of forecasting ability is evident for both short-term total variance and long-term variance but is primarily related to long-term variance. The results are of practical relevance for both investors and risk managers. (Less)
Please use this url to cite or link to this publication:
author
Nilsson, Albin LU
supervisor
organization
course
NEKP01 20241
year
type
H2 - Master's Degree (Two Years)
subject
keywords
Geopolitical Risk, Stock Market Volatility, GARCH-MIDAS, Advanced Economies
language
English
id
9173423
date added to LUP
2024-10-01 13:19:46
date last changed
2024-10-01 13:19:46
@misc{9173423,
  abstract     = {{This paper applies the GARCH-MIDAS (mixed data sampling) framework to examine if geopolitical risk indices (GPR) have predictive ability when forecasting stock market volatility in advanced economies. Stock market indices and country-specific GPR indices from 21 advanced economies are used to examine the out-of-sample predictability of short-term total variance and long-term variance. The main finding of this paper is that geopolitical risk indices have a predictive ability for stock market volatility in certain advanced economies, but not in all advanced economies. The improvement of forecasting ability is evident for both short-term total variance and long-term variance but is primarily related to long-term variance. The results are of practical relevance for both investors and risk managers.}},
  author       = {{Nilsson, Albin}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Volatility Forecasting Using Geopolitical Risk Indices: A GARCH-MIDAS Approach}},
  year         = {{2024}},
}