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Stock Market Volatility and Macroeconomic Fundamentals

Robert F. Engle, Eric Ghysels and Bumjean Sohn

Posted Online July 30, 2013
https://doi.org/10.1162/REST_a_00300

Review of Economics and Statistics

Volume 95 | Issue 3 | July 2013
p.776-797
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Stock Market Volatility and Macroeconomic Fundamentals

Robert F. Engle, Eric Ghysels and Bumjean Sohn
https://doi.org/10.1162/REST_a_00300
Received: January 09, 2010
Accepted: March 22, 2012
Published Online: July 30, 2013
Abstract

Abstract

We revisit the relation between stock market volatility and macroeconomic activity using a new class of component models that distinguish short-run from long-run movements. We formulate models with the long-term component driven by inflation and industrial production growth that are in terms of pseudo out-of-sample prediction for horizons of one quarter at par or outperform more traditional time series volatility models at longer horizons. Hence, imputing economic fundamentals into volatility models pays off in terms of long-horizon forecasting. We also find that macroeconomic fundamentals play a significant role even at short horizons.

Robert F. Engle
New York University
Eric Ghysels
University of North Carolina at Chapel Hill
Bumjean Sohn
Korea University Business School
https://doi.org/10.1162/REST_a_00300
Abstract

Abstract

We revisit the relation between stock market volatility and macroeconomic activity using a new class of component models that distinguish short-run from long-run movements. We formulate models with the long-term component driven by inflation and industrial production growth that are in terms of pseudo out-of-sample prediction for horizons of one quarter at par or outperform more traditional time series volatility models at longer horizons. Hence, imputing economic fundamentals into volatility models pays off in terms of long-horizon forecasting. We also find that macroeconomic fundamentals play a significant role even at short horizons.

Robert F. Engle
New York University
Eric Ghysels
University of North Carolina at Chapel Hill
Bumjean Sohn
Korea University Business School
Download Options

Stock Market Volatility and Macroeconomic Fundamentals

Robert F. Engle, Eric Ghysels and Bumjean Sohn
https://doi.org/10.1162/REST_a_00300
Received: January 09, 2010
Accepted: March 22, 2012
Published Online: July 30, 2013
Abstract

Abstract

We revisit the relation between stock market volatility and macroeconomic activity using a new class of component models that distinguish short-run from long-run movements. We formulate models with the long-term component driven by inflation and industrial production growth that are in terms of pseudo out-of-sample prediction for horizons of one quarter at par or outperform more traditional time series volatility models at longer horizons. Hence, imputing economic fundamentals into volatility models pays off in terms of long-horizon forecasting. We also find that macroeconomic fundamentals play a significant role even at short horizons.

Robert F. Engle
New York University
Eric Ghysels
University of North Carolina at Chapel Hill
Bumjean Sohn
Korea University Business School
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