Industry volatility concentration and the predictability of aggregate stock market volatility

Mengxi He, Danyan Wen, Lu Xing and Yaojie Zhang

International Review of Economics & Finance, 2024, vol. 95, issue C

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.

Keywords: Prediction; Industry volatility; Aggregate stock market volatility; Herfindahl index; Investor sentiment (search for similar items in EconPapers)
JEL-codes: C22 C53 G11 G17 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:95:y:2024:i:c:s1059056024004805

DOI: 10.1016/j.iref.2024.103488

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