Scandinavian Working Papers in Economics

Knut Wicksell Working Paper Series,
Lund University, Knut Wicksell Centre for Financial Studies

No 2013/4: Importance of the macroeconomic variables for variance prediction A GARCH-MIDAS approach

Hossein Asgharian (), Ai Jun Hou and Farrukh Javed

Abstract: This paper applies the GARCH-MIDAS (Mixed Data Sampling) model to examine whether information contained in macroeconomic variables can help to predict short-term and long-term components of the return variance. A principal component analysis is used to incorporate the information contained in different variables. Our results show that including low-frequency macroeconomic information in the GARCH-MIDAS model improves the prediction ability of the model, particularly for the long-term variance component. Moreover, the GARCH-MIDAS model augmented with the first principal component outperforms all other specifications, indicating that the constructed principal component can be considered as a good proxy of the business cycle.

Keywords: Mixed data sampling; long-term variance component; macroeconomic variables; principal component; variance prediction.

JEL-codes: G17

30 pages, February 24, 2013

Full text files

kwc-wp-2013-4.pdf PDF-file 

Download statistics

Questions (including download problems) about the papers in this series should be directed to Jens Forssbaeck ()
Report other problems with accessing this service to Sune Karlsson ().

This page generated on 2018-04-03 16:25:44.