International implied volatility risk indexes and Saudi stock return-volatility predictabilities

Abstract

This paper investigates the dynamic conditional correlation and the predictability between the Saudi stock return and international volatility risks indexes. Using a combined regression framework based on the DCC-GARCH (1.1) and CCF-Approaches, we find that the short-run and long-run persistence of shocks on the dynamic conditional correlation are evident for the all-sample peers. Particularly, the United States volatility risk index is dominant in forecasting Saudi stock market returns, whether for the in-sample analysis or the out-of-sample analysis and even after controlling for Saudi domestic volatility measures and others international volatility risk indexes. The cross-correlation tests corroborate also a higher presence of spreading shocks of volatility from the Saudi market return to international volatility risks related to financial markets, more so than the commodities markets.