The information content of cross-sectional volatility for future market volatility : evidence from Australian equity returns

![CDATA[This paper examines whether the firm-level and the industry-level cross-sectional volatility (CSV) contains any incremental information about the future market-level volatility in Australia. We analyze daily equity returns data from 2 January 1992 to 31 May 2004. Using a conditional volatility framework that allows for excess kurtosis in returns, we find that CSV does contain information beyond what is already contained in the lagged market-level return shocks and has a significantly positive relation with the conditional market volatility. Our sub-period analyses indicate that the effect of CSV is stronger in a relatively stable market condition than in a more volatile market condition. We also examine how the information in stock turnover and aggregate company announcements compares with that of CSV, and take a data-driven approach verify whether CSV is able to capture any information about possible multiple common factor shocks in asset returns. The explanatory power of CSV for the future market volatility remains robust even after controlling for the effects of stock turnover and company announcements. Our results are broadly consistent with the omitted factor explanation but, at the same time, also highlight the future market wide implications of CSV even when we control for the effects of multiple common factor shocks in asset returns.]]