Investors’ Uncertainty and Forecasting Stock Market Volatility

This article examines whether incorporating investors’ uncertainty, as captured by the conditional volatility of sentiment, can help forecasting stock markets. In this regard, using Markov-switching multifractal (MSM) model, we find that uncertainty substantially increase accuracy forecasts market according to forecast encompassing test. We further provide evidence MSM outperforms dynamic correlation-generalized autoregressive heteroskedasticity (DCC-GARCH) model.