Frontiers in Finance and Economics is a UGC APPROVED International Journal of Research

The Information Content of Cross-sectional Volatility for Future Market Volatility: Evidence from Australian Equity Returns

Md. Arifur Rahman
This paper presents research into the information content of firm-level and industry-level cross-sectional volatility (CSV) of daily equity returns for future market-level volatility in Australia. Using a conditional volatility framework that allows for commonly observed excess kurtosis in asset returns, we find that CSV does contain information beyond what is already contained in the lagged market-level return shocks and has a significant positive relationship with the conditional market volatility. Our analysis gives new empirical evidence that the effect of CSV is stronger in relatively stable market conditions than in more volatile market conditions. We also examine how the information content of stock turnover and aggregate company announcements compares with that of CSV, and take a novel data-driven approach to verify whether CSV captures any information about multiple common factor shocks in asset returns. The explanatory power of CSV for future market volatility remains robust even after controlling for the effects of stock turnover, company announcements and omitted factor shocks in returns.
Keywords: Incremental information, Conditional market volatility, Cross-sectional volatility, Stock turnover, Multiple common factor shocks
JEL Classification: G12, G14

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