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The importance of global economic policy uncertainty in predicting gold futures market volatility: A GARCH‐MIDAS approach
Author(s) -
Fang Libing,
Chen Baizhu,
Yu Honghai,
Qian Yichuo
Publication year - 2018
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.21897
Subject(s) - volatility (finance) , futures contract , autoregressive conditional heteroskedasticity , econometrics , economics , realized variance , futures market , predictive power , financial economics , philosophy , epistemology
This paper applies the GARCH‐MIDAS model to examine whether information contained in global economic policy uncertainty (GEPU) can help to predict short‐ and long‐term components of the gold futures return variance. Our results show that GEPU positively and significantly forecasts the future monthly volatilities for the aggregate global gold futures market. The forecasting power of GEPU remains strong in an out‐of‐sample setting. Moreover, further out‐of‐sample tests show that the GARCH‐MIDAS model with GEPU and realized volatility outperforms all other specifications, indicating that including low‐frequency GEPU information in the GARCH‐MIDAS model significantly enhances the forecasting ability of the model.