The information content of sentiment indices for forecasting Value at Risk and Expected Shortfall in equity markets

Naimoli, Antonio (2022): The information content of sentiment indices for forecasting Value at Risk and Expected Shortfall in equity markets.

Abstract

The aim of this paper is to investigate the impact of public sentiment on tail risk forecasting. In this framework, we extend the Realized Exponential GARCH model to directly incorporate information from realized volatility measures and exogenous variables, thus resulting in a novel dynamically complete specification denoted as the Complete REGARCH-X model. Several sentiment indices related to social media and journal articles regarding the economy and stock market volatility are considered as potential drivers of volatility dynamics. An application to the prediction of daily Value at Risk and Expected Shortfall for the Standard & Poor’s 500 index provides evidence that combining the information content of realized volatility and sentiment measures can lead to significant accuracy gains in forecasting tail risk.

• Item Type: MPRA Paper
• Language: English
• Keywords: Realized Exponential GARCH; sentiment indices; economic policy uncertainty; tail risk forecasting; risk management.
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C53 - Forecasting and Prediction Methods ; Simulation Methods; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D80 - General; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E66 - General Outlook and Conditions; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill

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