Abstract:
Using data for the group of G7 countries and China for the sample period 1996Q1 to
2020Q4, we study the role of uncertainty and spillovers for the out-of-sample forecasting of the
realized variance of gold returns and its upside (good) and downside (bad) counterparts. We go
beyond earlier research in that we do not focus exclusively on U.S.-based measures of uncertainty,
and in that we account for international spillovers of uncertainty. Our results, based on the Lasso
estimator, show that, across the various model configurations that we study, uncertainty has a more
systematic effect on out-of-sample forecast accuracy than spillovers. Our results have important
implications for investors in terms of, for example, pricing of related derivative securities and the
development of portfolio-allocation strategies.
