Forecasting power of infectious diseases-related uncertainty for gold realized variance

Abstract

We examine the forecasting power of a daily newspaper-based index of uncertainty associated with infectious diseases (EMVID) for gold market returns volatility via the heterogeneous autoregressive realized variance (HAR-RV) model. Our results show that the EMVID index increases realized variance (RV) at the highest level of statistical significance within-sample, while it improves the forecast accuracy of gold realized variance at short-, medium-, and long-run horizons in a statistically significant manner. Importantly, by assessing the role of this index during the recent pandemic, we find strong evidence for its critical role in forecasting gold RV. Such evidence has important portfolio implications for investors during the current period of unprecedented levels of uncertainty resulting from the outbreak of COVID-19.