Volatility jumps: The role of geopolitical risks

By Konstantinos Gkillas, Rangan Gupta, M. Wohar. Finance Research Letters, 2018

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In this paper we analyse the role of a news-based index of geopolitical risks (GPRs), in predicting volatility jumps in the Dow Jones Industrial Average (DJIA) over the monthly period of 1899:01 to 2017:12, with the jumps having been computed based on daily data over the same period. Standard linear Granger causality test fail to detect any evidence of GPRs causing volatility jumps. But given strong evidence of nonlinearity and structural breaks between jumps and GPRs, we next employ a nonparametric causality-in-quantiles test, because the linear model is misspecified. Using this data-driven robust approach we were able to detect overwhelming evidence of GPRs predicting volatility jumps in the DJIA over its entire conditional distribution.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/3d24ccbef78f33da02bcbaec83f1f38364d78672