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Industry volatility concentration and the predictability of aggregate stock market volatility

Author

Listed:
  • He, Mengxi
  • Wen, Danyan
  • Xing, Lu
  • Zhang, Yaojie

Abstract

This paper proposes an industry volatility concentration indicator measured by the Herfindahl index (HHI) of industry volatilities. Based on data from January 1928 to December 2020, we find that HHI can predict aggregate stock market volatility significantly both in- and out-of-sample. Based on the stock market index and volatility index, we observe that HHI delivers sizeable economic value for market investors. Further analysis suggests that the predictive power of HHI remains significant for longer forecast horizons, is mainly concentrated in expansions, and is not subsumed by extant economic predictors. Finally, we find that HHI provides additional information beyond market volatility lags and can trace and forecast investor sentiment.

Suggested Citation

  • He, Mengxi & Wen, Danyan & Xing, Lu & Zhang, Yaojie, 2024. "Industry volatility concentration and the predictability of aggregate stock market volatility," International Review of Economics & Finance, Elsevier, vol. 95(C).
    • Handle: RePEc:eee:reveco:v:95:y:2024:i:c:s1059056024004805
    DOI: 10.1016/j.iref.2024.103488
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    More about this item

    Keywords

    Prediction; Industry volatility; Aggregate stock market volatility; Herfindahl index; Investor sentiment;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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