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Risk Analysis of China Stock Market During Economic Downturns–Based on GARCH-VaR and Wavelet Transformation Approaches

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  • Yiwen Cui
  • Lei Li
  • Zijie Tang

Abstract

Accurately measuring the risk of stock market is important for improving the risk management level of stock market and reducing losses for the investors, especially during economic downturns. In this paper, to study the stock market risk in economic downturns, we first adopted wavelet transformation analysis to detect and define those phases. This paper selected the Shanghai Composite Index and eleven representative sector indexes from January 1, 2008 to January 31, 2020, established GARCH models based on student-t and GED distributions, and found the volatility aggregation and the leverage effect of the stock market. This paper measured the risk of stock market by the parameter method, using conditional volatility estimated by the GARCH models, and carried out back-testing analysis and the Kupiec failure rate test on measurement accuracy of VaR. To study the stock market risk during economic downturns, this paper calculated and compared the risks of different sectors during the corresponding phases, and the results showed that the risks in real estate, industrial, telecom service sectors are much higher during financial downturns. Finally, this paper summarized the conclusion and put forward suggestions for investors from the perspective of risk management.

Suggested Citation

  • Yiwen Cui & Lei Li & Zijie Tang, 2021. "Risk Analysis of China Stock Market During Economic Downturns–Based on GARCH-VaR and Wavelet Transformation Approaches," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 11(4), pages 322-336.
    • Handle: RePEc:asi:aeafrj:v:11:y:2021:i:4:p:322-336:id:2083
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    Cited by:

    1. Beata Bieszk-Stolorz & Iwona Markowicz, 2021. "Decline in Share Prices of Energy and Fuel Companies on the Warsaw Stock Exchange as a Reaction to the COVID-19 Pandemic," Energies, MDPI, vol. 14(17), pages 1-17, August.

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