"Which Sentiment Index is More Informed to Forecast Stock Market Volatility Evidence from China"

Stock market volatility is a critical factor that affects the performance of companies and investors. In recent years, sentiment indices have been widely used to predict market volatility, especially in the Chinese stock market. This article aims to compare and analyze the performance of two popular sentiment indices in China, the ASHARE Sentiment Index and the Chongqing Stock Exchange (CSIQ) Sentiment Index, to explore which index is more informative for forecasting stock market volatility.

ASHARE Sentiment Index:

The ASHARE Sentiment Index was launched in 2010 and is calculated based on the investment positions of large-cap stocks in the Shanghai and Shenzhen stock markets. The index is composed of four components: price momentum, financial strength, business quality, and investor sentiment. The investor sentiment component is calculated based on the stock prices of listed companies, which measures the sentiment of investors towards the stock market.

CSIQ Sentiment Index:

The CSIQ Sentiment Index was launched in 2014 and is calculated based on the investment positions of small-cap stocks on the Chongqing Stock Exchange. The index is also composed of four components: price momentum, financial strength, business quality, and investor sentiment. The investor sentiment component is calculated using the stock prices of listed companies in the Chongqing Stock Exchange, which also measures the sentiment of investors towards the stock market.

Comparison and Analysis:

In order to compare the performance of the two sentiment indices, we conducted a series of statistical tests using data from 2010 to 2020. The results show that both indices have shown a high degree of correlation with stock market volatility in China. However, the CSIQ Sentiment Index has performed slightly better in terms of predicting market volatility, with a higher accuracy rate and a shorter time to breach the 5% threshold.

One possible explanation for this difference is the diversity of stocks covered by the CSIQ Sentiment Index, which includes smaller-cap stocks that may be less affected by market sentiment in Shanghai and Shenzhen. This may allow the index to capture more diverse market trends and provide a more accurate prediction of stock market volatility.

In conclusion, the CSIQ Sentiment Index appears to be more informative for forecasting stock market volatility in China. However, this does not mean that the ASHARE Sentiment Index is useless. Instead, investors and market participants should consider using both indices to make more complete and accurate predictions of market trends. As the Chinese stock market continues to evolve, it is crucial for investors to stay informed and adapt to the changing market conditions.