A note on financial vulnerability and volatility in emerging stock markets: evidence from GARCH-MIDAS models

ABSTRACT

This paper establishes a predictive relationship between financial vulnerability and volatility in emerging stock markets. Focusing on China and India and utilizing GARCH-MIDAS models, we show that incorporating financial vulnerability can substantially improve the forecasting power of standard macroeconomic fundamentals (output growth, inflation and monetary policy interest rate) for stock market volatility. The findings have significant implications for investors to improve the accuracy of volatility forecasts.

JEL CLASSIFICATION:

• C32
• C53
• G15
• G17

KEYWORDS:

• Stock market volatility
• financial vulnerability
• GARCH-MIDAS
• emerging markets

Disclosure statement

No potential conflict of interest was reported by the author(s).

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Additional information

Funding

This work was supported by the Humanities and Social Science Research Foundation of the Ministry of Education of China [18YJC790206]; LiaoNing Revitalization Talents Program [XLYC1907192].