Uncertainty‐driven oil volatility risk premium and international stock market volatility forecasting

• DOI: 10.1002/for.2923
• Publication Date: 2022-10-17T13:31:53Z
• Authors: Tong Fang; Deyu Miao; Zhi Su; Libo Yin
• Keywords: Realized variance; Variance risk premium; Variance swap

Abstract Forecasting international stock market volatility using the oil risk premium (OVRP) is important for asset allocation and financial management. In previous literature, issue of biased OVRP has not been well addressed. The defined as difference between ex ante risk‐neutral expectation return variation realized variance. This a estimator argued by studies. this paper, we propose new measure OVRP, namely, uncertainty‐driven (UOVRP), in which expected conditional variance futures returns estimated typical GARCH‐MIDAS model, long‐term component directly determined several uncertainty indices. Using heterogeneous autoregressive models (HAR), find that UOVRPs significantly positively predict most in‐sample. Furthermore, it outperforms volatility, “model‐free” recently proposed predictors American, European, Pacific markets out‐of‐sample. On average, driven world index U.S. economic policy perform best among all UOVRPs. predictive ability robust across series checks.