Air quality index and the Chinese stock market volatility: Evidence from both market and sector indices

Abstract

This paper mainly examines whether the air quality index can forecast the Chinese stock market volatility. By comparing the predictability of air quality index, leverage components, jump components, and overnight information, we find that air quality index is more efficient to predict the stock market volatility, during medium-term and long-term horizons. Importantly, from both market and sector indices, we find the air quality index is still more informative than the leverage components, jump components, and overnight information for forecasting the stock market volatility. In addition, leverage components have better performances during a longer horizon for both market and sector indices. This paper tries to provide new evidence for stock market volatility prediction based on the Chinese aggregate stock market and different stock sectors.