Title: The role of local and global economic policy uncertainty in GARCH-MIDAS forecasts of US state-level volatility Authors:  Oguzhan Cepni - Copenhagen Business School (Denmark)
Giampiero Gallo - NYU in Florence (Italy)
Rangan Gupta - University of Pretoria (South Africa)
Vincenzo Candila - University of Salerno (Italy) [presenting]
Abstract: The aim is to examine the influence of local (state-specific) and global Economic Policy Uncertainty (EPU) on the volatility of US state-level equity returns. We employ a GARCH-MIDAS approach incorporating multiple EPU indices as low-frequency predictors of daily stock return volatility. To address the challenge of selecting the most relevant EPU indices, we utilize an Elastic Net (EN) shrinkage method to integrate forecasts from different models. The results reveal that the proposed model, which leverages information from both local and global EPU indices, generally outperforms single specifications. Further, a cluster analysis based on the volatility forecasts uncovers distinct geographical patterns, suggesting that state-level volatility is influenced by both state-specific and nationwide policy uncertainties. These findings highlight the importance of considering both local and global EPU in understanding and predicting the volatility dynamics at the regional level.