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Differences of opinion and stock market volatility: evidence from a nonparametric causality-in-quantiles approach

Author

Listed:
  • Mehmet Balcilar

    () (Eastern Mediterranean University
    University of Pretoria
    Montpellier Business School)

  • Riza Demirer

    () (Southern Illinois University Edwardsville)

  • Rangan Gupta

    () (University of Pretoria
    IPAG Business School)

  • Mark E. Wohar

    () (University of Nebraska at Omaha
    Loughborough University)

Abstract

Abstract This paper examines whether the differences of opinion across active money managers relates to stock market volatility via the recently proposed nonparametric causality-in-quantiles test. Using the dispersion in equity market exposures of active managers as a proxy for differences in opinion, we analyze the predictability of (realized) volatility of the S&P500 for the period July, 2006-August, 2016. Unlike the result of no predictability obtained under the misspecified linear set-up, our nonparametric causality-in-quantiles test indicates that dispersion in active managers’ risk exposures to the stock market can predict volatility over the range of quantiles that correspond to moderately high levels of market volatility. Our findings are in line with the previous literature that relates divergent beliefs across investors to subsequent stock returns and suggest that the effect on subsequent returns is likely to be transmitted via the volatility channel. Our results highlight the importance of detecting and modeling nonlinearity when analyzing the information content of divergent beliefs across market participants.

Suggested Citation

  • Mehmet Balcilar & Riza Demirer & Rangan Gupta & Mark E. Wohar, 2018. "Differences of opinion and stock market volatility: evidence from a nonparametric causality-in-quantiles approach," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 42(2), pages 339-351, April.
  • Handle: RePEc:spr:jecfin:v:42:y:2018:i:2:d:10.1007_s12197-017-9404-z
    DOI: 10.1007/s12197-017-9404-z
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    References listed on IDEAS

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    Cited by:

    1. Rangan Gupta, 2018. "Manager Sentiment and Stock Market Volatility," Working Papers 201853, University of Pretoria, Department of Economics.

    More about this item

    Keywords

    Realized Volatility; Differences of opinion; Quantile causality;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G1 - Financial Economics - - General Financial Markets

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