Forecasting stock market volatility: Can the risk aversion measure exert an important role?

•We examine the predictability of time-varying risk aversion on stock volatility.•We use a simple linear autoregressive model to capture predictive relationships.•In-sample results show time-varying risk aversion has significant predictability.•It is statistically and economically significant for out-of-sample performance. In this paper, we predict realized volatility of stock return by utilizing time-varying risk aversion based on a simple linear autoregressive model. Our in-sample results suggest that time-varying risk aversion have significant impact for stock return volatility. In terms of out-of-sample forecasting performance, the empirical results indicate that the incorporation of time-varying risk aversion in the benchmark model can yield more accurate stock return volatility forecasts. Notably, the out-of-sample forecasting results confirm that our conclusions are robust when we apply alternative lag orders and alternative prediction evaluation periods. Finally, we study links between the prediction ability of time-varying risk aversion and the volatility of other stock indices and two kinds of crude oil, and find that the new predictor can effectively strengthen forecasting performance in most case. In view of the importance of volatility risk in the asset pricing process, our research is of great significance for financial asset participants.