Methodological use of macroeconomic variables in volatility forecasting

Establish principled methodologies for incorporating macroeconomic variables into models that forecast U.S. equity market volatility.

Background

While the importance of major macroeconomic variables for equity markets is well documented, the authors state that it remains unclear how such variables should be incorporated into forecasting frameworks for volatility. They propose using attention and sentiment proxies tailored to specific macroeconomic topics as one approach.

Clarifying methodological standards for how macroeconomic fundamentals should be integrated into volatility forecasting would aid model design, parameterization, and evaluation, especially given infrequent announcements, shifting expectations, and gradual pricing-in effects highlighted in the paper.