Fear, Policy Noise and Market Pain: Can Free Uncertainty Indicators Improve S&P 500 Risk Forecasts
DOI:
https://doi.org/10.54691/6t1wc822Keywords:
Realised volatility, downside risk, VIX, economic policy uncertainty, credit spreads, forecastingAbstract
This study asks whether freely available uncertainty and stress indicators improve weekly forecasts of S&P 500 risk once past returns and past volatility are already in the model. Using 1,898 weekly observations from January 1990 to May 2026, it models two targets, namely next-week realised volatility and a next-week downside event defined as the worst 5 per cent of weekly returns. Predictors are the VIX, economic policy uncertainty, a corporate credit spread, the yield curve slope, the short-term interest rate and oil market volatility, all lagged by one week. The VIX is the only added variable that improves the volatility forecast in a clear way, lifting the adjusted R-squared from 0.519 to 0.593 and reducing out-of-sample error, while policy uncertainty, the credit spread and the other controls add very little once it is present. For downside events the wider stress set raises in-sample fit but does not survive out of sample, where the models are statistically hard to separate and the leaner specification does at least as well. The findings support the value of market-based fear measures and offer a more cautious view of the broader uncertainty indicators.
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