Forecasting Realized Stock-Market Volatility: Do Industry Returns Have Predictive Value?

38 Pages Posted: 28 Jan 2021

See all articles by Riza Demirer

Riza Demirer

Southern Illinois University Edwardsville - Department of Economics & Finance; Economic Research Forum (ERF)

Rangan Gupta

University of Pretoria - Department of Economics

Christian Pierdzioch

University of the German Federal Armed Forces - Department of Economics

Date Written: December 8, 2020

Abstract

Yes, they do. Utilizing a machine-learning technique known as random forests to compute forecasts of realized (good and bad) stock market volatility, we show that incorporating the information in lagged industry returns can help improve out-of sample forecasts of aggregate stock market volatility. While the predictive contribution of industry level returns is not constant over time, industrials and materials play a dominant predictive role during the aftermath of the 2008 global financial crisis, highlighting the informational value of real economic activity on stock market volatility dynamics. Finally, we show that incorporating lagged industry returns in aggregate level volatility forecasts benefits forecasters who are particularly concerned about under-predicting market volatility, yielding greater economic benefits for forecasters as the degree of risk aversion increases.

Keywords: Stock market, Realized volatility, Industry returns, Market efficiency and information

JEL Classification: G17, Q02, Q47

Suggested Citation

Demirer, Riza and Gupta, Rangan and Pierdzioch, Christian, Forecasting Realized Stock-Market Volatility: Do Industry Returns Have Predictive Value? (December 8, 2020). Available at SSRN: https://ssrn.com/abstract=3744537 or http://dx.doi.org/10.2139/ssrn.3744537

Riza Demirer (Contact Author)

Southern Illinois University Edwardsville - Department of Economics & Finance ( email )

Department of Economics & Finance
Alumni Hall 3144
Edwardsville, IL 62026-1102
United States
(618) 650-2939 (Phone)
(618) 650-3047 (Fax)

HOME PAGE: http://www.siue.edu/~rdemire/

Economic Research Forum (ERF)

21 Al-Sad Al-Aaly St.
(P.O. Box: 12311)
Cairo, Cairo
Egypt

HOME PAGE: http://erf.org.eg/affiliates/riza-demirer-3/

Rangan Gupta

University of Pretoria - Department of Economics ( email )

South Africa

Christian Pierdzioch

University of the German Federal Armed Forces - Department of Economics ( email )

Holstenhofweg 85
Hamburg, 22043
Germany

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