International commodity-market tail risk and stock volatility

Using the method of, this study constructs a tail risk predictor of the international commodity market to forecast US stock volatility. The in-sample results show that tail risk contains significant interpretive ability for stock volatility. Being of our interest, the tail risk predictor can successfully predict the US stock volatility from both statistical and economic viewpoints. The results of controlling 12 popular macroeconomic variables suggest that tail risk contains incremental information for stock volatility. To further confirm our findings, we examine the forecasting performance of the tail risk predictor for 12 industrial portfolios.

Automated summary

This study constructs a tail risk predictor of the international commodity market and successfully predicts the volatility of the US stock market. The results demonstrate that tail risk contains significant interpretive ability for stock volatility.