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Stock volatility predictability in bull and bear markets. (English) Zbl 1454.91255

Summary: The recent literature on stock return predictability suggests that it varies substantially across economic states, being strongest during bad economic times. In line with this evidence, we document that stock volatility predictability is also state dependent. In particular, in this paper, we use a large data set of high-frequency data on individual stocks and a few popular time-series volatility models to comprehensively examine how volatility forecastability varies across bull and bear states of the stock market. We find that the volatility forecast horizon is substantially longer when the market is in a bear state than when it is in a bull state. In addition, over all but the shortest horizons, the volatility forecast accuracy is higher when the market is in a bear state. This difference increases as the forecast horizon lengthens. Our study concludes that stock volatility predictability is strongest during bad economic times, proxied by bear market states.

MSC:

91G15 Financial markets
62P05 Applications of statistics to actuarial sciences and financial mathematics
62M20 Inference from stochastic processes and prediction

Software:

RiskMetrics
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Full Text: DOI

References:

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