Which types of commodity price information are more useful for predicting US stock market volatility? |
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Institution: | 1. School of Economics & Management, Southwest Jiaotong University, Chengdu, China;2. Department of Mechanical and Industrial Engineering, Ryerson University, Toronto M5B 2K3, ON, Canada;3. School of Economics and Management, Nanjing University of Science and Technology, Nanjing, China |
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Abstract: | This study aims to investigate which types of commodity price information are more useful for predicting US stock market realized volatility (RV) in a data-rich word. The standard predictive regression framework and monthly RV data are used to explore the RV predictability of commodity futures for the next-month RV on S&P 500 spot index. We utilize principal component analysis (PCA) and factor analysis (FA) to extract the common factors for each type and all types of commodity futures. Our results indicate that the futures volatility information of grains and softs has a significant predictive ability in forecasting the RV of the S&P 500. In addition, the FA method can yield better forecasts than the PCA and average methods in most cases. Further analysis shows that the volatility information of grains and softs exhibits higher informativeness during recessions and pre-crises. Finally, the forecasts of the five combination methods and different out-of-sample periods confirm our results are robust. |
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Keywords: | Commodity futures volatility Stock market volatility Factor analysis Principal component analysis C22 C53 C58 G17 |
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