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Examining Chinese volume–volatility nexus: A regime-switching perspective

Author

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  • Wang, Zhenxin
  • Wang, Shaoping
  • Yan, Yayi
  • Xia, Yingcun

Abstract

This study developed an observation-driven endogenous regime-switching model to observe the relationship between trading volume and return volatility based on a regime-switching perspective. We proposed a maximum likelihood estimation method to estimate the unknown parameters and introduced two likelihood ratio statistics to examine the effects of observable variables on regime shifts. We conducted extensive simulation experiments, confirming that the method performed well regarding finite samples. We applied the proposed model to examine the volume–volatility nexus in China’s stock market. Empirical findings indicate that (1) the relationship between trading volume and volatility is regime specific, (2) the Sequential Information Arrival Hypothesis (SIAH) was more significant in the low-volatility state, and (3) a significant leverage effect can be observed in the Chinese stock market.

Suggested Citation

  • Wang, Zhenxin & Wang, Shaoping & Yan, Yayi & Xia, Yingcun, 2025. "Examining Chinese volume–volatility nexus: A regime-switching perspective," Economic Modelling, Elsevier, vol. 144(C).
    • Handle: RePEc:eee:ecmode:v:144:y:2025:i:c:s0264999324003407
    DOI: 10.1016/j.econmod.2024.106983
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    References listed on IDEAS

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    More about this item

    Keywords

    Leverage effect; Regime-switching model; Sequential Information Arrival Hypothesis; Stock return volatility; Trading volume;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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