Forecasting stock market volatility: the role of gold and exchange rate

Abstract

The objective of our paper is to show that gold and exchange rate volatility is predictive of stock volatility from both in-sample and out-of-sample perspectives. There exists very significant predictability from gold and exchange rate volatility to Hang Seng Index (HSI) return volatility among in-sample results. The out-of-sample results demonstrate the gold and exchange rate volatility extracts significantly useful information for Hang Seng Index (HSI) return volatility. Furthermore, the performance of the predictive ability of gold and exchange rate volatility is robust during business cycles and incremental framework.

Keywords

• stock return volatility
• gold
• exchange rate
• prediction ability
• forecasting