Can idiosyncratic volatility help forecast stock market volatility?

This paper examines the predictive power of idiosyncratic volatility in the context of daily stock market volatility dynamics. Specifically, the relative performance of various models of market volatility is considered with respect to whether idiosyncratic volatility is excluded or included as an explanatory variable in such models. Using high frequency data covering the thirty stocks within the Dow Jones Industrial Average (DJIA) index, the results indicate that the inclusion of idiosyncratic volatility leads to significant in-sample and out-of-sample improvements in the fit of all the volatility models considered. These results are shown to be relatively robust to the loss function adopted by the forecaster, with reasonable forecast accuracy improvements available to such forecasters.