Forecasting the volatility of EUA futures with economic policy uncertainty using the GARCH-MIDAS model
Abstract This study investigates the impact of economic policy uncertainty (EPU) on the volatility of European Union (EU) carbon futures prices and whether it has predictive power for the volatility of carbon futures prices. The GARCH-MIDAS model is applied for evaluating the impact of different EPU...
| Main Authors: | , , , |
|---|---|
| Format: | Article |
| Language: | English |
| Published: |
SpringerOpen
2021-10-01
|
| Series: | Financial Innovation |
| Subjects: | |
| Online Access: | https://doi.org/10.1186/s40854-021-00292-8 |
| _version_ | 1819151716046602240 |
|---|---|
| author | Jian Liu Ziting Zhang Lizhao Yan Fenghua Wen |
| author_facet | Jian Liu Ziting Zhang Lizhao Yan Fenghua Wen |
| author_sort | Jian Liu |
| collection | DOAJ |
| description | Abstract This study investigates the impact of economic policy uncertainty (EPU) on the volatility of European Union (EU) carbon futures prices and whether it has predictive power for the volatility of carbon futures prices. The GARCH-MIDAS model is applied for evaluating the impact of different EPU indexes on the price volatility of European Union Allowance (EUA) futures. We then compare the predictive power for the volatility of the two GARCH-MIDAS models based on different EPU indexes and six GARCH-type models. Our empirical results show that the GARCH-MIDAS models, which exhibit superior out-of-sample predictive ability, outperform GARCH-type models. The results also indicate that EPU has noticeable effect on the volatility of EUA futures. Specifically, the forecast accuracy of the EU EPU index is significantly higher than that of the global EPU index. Robustness checks further confirm that the EPU index (especially the EPU index of the EU) has strong predictive power for EUA futures prices. Additionally, using the volatility forecasting methods that GARCH-MIDAS models combine with the EPU index, investors can construct their portfolios to realize economic returns. |
| first_indexed | 2024-12-22T14:37:49Z |
| format | Article |
| id | doaj.art-201a52a29ea1423bbb0786fca655f360 |
| institution | Directory Open Access Journal |
| issn | 2199-4730 |
| language | English |
| last_indexed | 2024-12-22T14:37:49Z |
| publishDate | 2021-10-01 |
| publisher | SpringerOpen |
| record_format | Article |
| series | Financial Innovation |
| spelling | doaj.art-201a52a29ea1423bbb0786fca655f3602022-12-21T18:22:36ZengSpringerOpenFinancial Innovation2199-47302021-10-017111910.1186/s40854-021-00292-8Forecasting the volatility of EUA futures with economic policy uncertainty using the GARCH-MIDAS modelJian Liu0Ziting Zhang1Lizhao Yan2Fenghua Wen3School of Economics and Management, Changsha University of Science and TechnologySchool of Economics and Management, Changsha University of Science and TechnologySchool of Business, Hunan Normal UniversityBusiness School, Central South UniverdityAbstract This study investigates the impact of economic policy uncertainty (EPU) on the volatility of European Union (EU) carbon futures prices and whether it has predictive power for the volatility of carbon futures prices. The GARCH-MIDAS model is applied for evaluating the impact of different EPU indexes on the price volatility of European Union Allowance (EUA) futures. We then compare the predictive power for the volatility of the two GARCH-MIDAS models based on different EPU indexes and six GARCH-type models. Our empirical results show that the GARCH-MIDAS models, which exhibit superior out-of-sample predictive ability, outperform GARCH-type models. The results also indicate that EPU has noticeable effect on the volatility of EUA futures. Specifically, the forecast accuracy of the EU EPU index is significantly higher than that of the global EPU index. Robustness checks further confirm that the EPU index (especially the EPU index of the EU) has strong predictive power for EUA futures prices. Additionally, using the volatility forecasting methods that GARCH-MIDAS models combine with the EPU index, investors can construct their portfolios to realize economic returns.https://doi.org/10.1186/s40854-021-00292-8EUAEconomic policy uncertaintyGARCH-MIDASVolatility forecastingFutures |
| spellingShingle | Jian Liu Ziting Zhang Lizhao Yan Fenghua Wen Forecasting the volatility of EUA futures with economic policy uncertainty using the GARCH-MIDAS model Financial Innovation EUA Economic policy uncertainty GARCH-MIDAS Volatility forecasting Futures |
| title | Forecasting the volatility of EUA futures with economic policy uncertainty using the GARCH-MIDAS model |
| title_full | Forecasting the volatility of EUA futures with economic policy uncertainty using the GARCH-MIDAS model |
| title_fullStr | Forecasting the volatility of EUA futures with economic policy uncertainty using the GARCH-MIDAS model |
| title_full_unstemmed | Forecasting the volatility of EUA futures with economic policy uncertainty using the GARCH-MIDAS model |
| title_short | Forecasting the volatility of EUA futures with economic policy uncertainty using the GARCH-MIDAS model |
| title_sort | forecasting the volatility of eua futures with economic policy uncertainty using the garch midas model |
| topic | EUA Economic policy uncertainty GARCH-MIDAS Volatility forecasting Futures |
| url | https://doi.org/10.1186/s40854-021-00292-8 |
| work_keys_str_mv | AT jianliu forecastingthevolatilityofeuafutureswitheconomicpolicyuncertaintyusingthegarchmidasmodel AT zitingzhang forecastingthevolatilityofeuafutureswitheconomicpolicyuncertaintyusingthegarchmidasmodel AT lizhaoyan forecastingthevolatilityofeuafutureswitheconomicpolicyuncertaintyusingthegarchmidasmodel AT fenghuawen forecastingthevolatilityofeuafutureswitheconomicpolicyuncertaintyusingthegarchmidasmodel |