The effects of macroeconomic variables on Asian stock market volatility: A GARCH MIDAS approach

Abstract: This paper aims to investigate the effects of macroeconomic variables on stock market volatility in three Asian countries by applying GARCH MIDAS model. The study covers the period from 01/2003 to 06/2014. The GARCH MIDAS framework allows to incorporate macro variables directly in the model and obtain long-term and short-term volatility separately. Empirical findings show that some macroeconomic variables significantly affect stock market volatility. While Chinese and South Korean stock market reacts to either inflation or industrial production growth information, Japanese stock market is sensitive to both factors. In addition, macroeconomic factors influence three markets at different magnitude. The results also indicate that three markets behave differently to the same factors. Real oil price shock stems from aggregate demand significantly lowers Japanese stock market volatility. In contrast, South Korean and Chinese stock market volatility is positively influenced by the same shocks.