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Physica A Statistical Mechanics and its Applications

The purpose of this paper is to investigate the impact of economic policy uncertainty on stock volatility forecast. We apply the GARCH–MIDAS model which can directly incorporate low-frequency economic policy uncertainty index and high-frequency stock return to model and forecast stock index volatility. The in-sample estimation results show that both level and variance of the change rate of Chinese economic policy uncertainty index provide useful information beyond realized volatility for stock index volatility forecast. The out-of-sample forecast results indicate that a combination of realized volatility and economic policy uncertainty in GARCH–MIDAS model can significantly improve the forecast performance of stock index volatility.

The impact of economic policy uncertainty on stock volatility: Evidence from GARCH–MIDAS approach