Forecasting stock market realized volatility: The role of investor attention to the price of petroleum products

Abstract

This study investigates the role of investor attention to the price of petroleum products (APPP) in forecasting Chinese stock market volatility. In the in-sample analysis, we find that a higher APPP index can lead to higher stock market volatility in the next month. The out-of-sample results show that the APPP index has strong predictive power for Chinese stock market volatility. Moreover, the volatility predictability of the APPP index is stronger than that of all commonly used economic and economic policy uncertainty predictors. Furthermore, when compared with the commonly used economic and economic policy uncertainty predictors, we find that the APPP index contains more valuable information for predicting stock market volatility than traditional predictors. When performing two robustness tests, alternative forecasting windows and lags of RV, the results are still robust. Further analysis indicates that the forecasting power of the APPP index for stock market volatility concentrates on the low-volatility regime.