Abstract:
This paper investigates how changes in measures of sector and market variance affect equity variance by examining forecasts of equity variance over 1, 5, and 22 day time horizons. These forecasts were generated using heterogeneous autoregressive regressions that included measures of sector and market variance. The results demonstrate that sector and market variance both play an important role in determining equity variance. Further, the inclusion of measures of sector and market variance improves goodness of fit and decreases forecasting errors. These results imply that the inclusion of these measures could improve predictive models of equity variance.
