Abstract:
Studying the question of whether macroeconomic predictors play a role in forecasting
stock-market volatility has a long and significant tradition in the empirical finance literature. We
went beyond the earlier literature in that we studied whether the presidential approval rating can be
used as a single-variable substitute in place of standard macroeconomic predictors when forecasting
stock-market volatility in the United States (US). Political-economy considerations imply that the
presidential approval rating should reflect fluctuations in macroeconomic predictors and, hence, may
absorb or even improve on the predictive value for stock-market volatility of the latter. We studied
whether the presidential approval rating has predictive value out-of-sample for realized stock-market
volatility and, if so, which types of investors benefit from using it.
