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Market broadening and future volatility: A study of Russell 2000 and S&P 500 equal weight ETFs

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  • Valadkhani, Abbas
  • O'Mahony, Barry

Abstract

This paper investigates the relationship between market broadening and future volatility in the U.S. using monthly data from May 2003 to July 2024. Market broadening is measured by the price returns of two exchange-traded funds (ETFs): the S&P 500 Equal Weight ETF (RSP) and the Russell 2000 Equal Weight ETF (IWM). We employ an Exponential Generalized Autoregressive Conditional Heteroskedasticity (EGARCH) model to ensure the conditional variance remains positive, even when ETF returns are negative. Our findings support an inverted-U hypothesis, suggesting that market gains were more widely dispersed until 2014 but have since become concentrated among mega-cap stocks. More importantly, the results indicate that broadening market participation significantly reduces future volatility. This effect is consistent regardless of whether market broadening is measured using RSP or IWM. Our estimated time-varying GARCH series exhibit strong co-movements and co-jumpings with the VIX index, accurately capturing most of its turning points and critical events. This study offers practical insights into market behavior, investment strategies, and the risks of gains mainly driven by mega-cap companies, especially for market-cap ETF investors, without the need to analyze individual stocks or use hard-to-get data.

Suggested Citation

  • Valadkhani, Abbas & O'Mahony, Barry, 2025. "Market broadening and future volatility: A study of Russell 2000 and S&P 500 equal weight ETFs," The North American Journal of Economics and Finance, Elsevier, vol. 76(C).
    • Handle: RePEc:eee:ecofin:v:76:y:2025:i:c:s1062940825000099
    DOI: 10.1016/j.najef.2025.102369
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    References listed on IDEAS

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    More about this item

    Keywords

    Market broadening; Volatility; Russell 2000; S&P500; EGARCH;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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