Forecasting the aggregate stock market volatility in a data-rich world. Issue 32 (8th July 2020)

• Record Type: Journal Article
• Authors: Liu, Li; Ma, Feng; Zeng, Qing; Zhang, Yaojie
• Is Part Of: Applied economics. Volume 52:Issue 32(2020)
• Page Start: 3448
• Page End: 3463
• Publication Date: 2020-07-08
• Subjects: Volatility forecasting -- Monthly realized volatility -- Combination forecasts -- Lasso and elastic net -- Economic value; B22 -- C22 -- C53; Economics -- Periodicals; 330
• DOI: 10.1080/00036846.2020.1713291
• Languages: English
• ISSNs: 0003-6846

Abstract

ABSTRACT: In this article, we utilize the basic lasso and elastic net models to revisit the predictive performance of aggregate stock market volatility in a data-rich world. Motivated by the existing literature, we determine several candidate predictors that have 22 technical indicators and 14 macroeconomic and financial variables. Our out-of-sample results reveal several noteworthy findings. First, few macroeconomic and financial variables and most of technical indicators have superior performance relative to the benchmark model. Second, combination forecasts are able to significantly beat the benchmark and some signal predictors Third, the lasso and elastic models with all predictors can generate more accurate forecasts than the benchmark and some other predictors in both the statistical and economic sense. Fourth, the lasso and elastic models exhibit higher forecast accuracy during periods of expansions and recessions. Finally, our findings are robust to several tests, such as different forecasting windows, forecasting models, and forecasting evaluations.