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Conditional heteroscedasticity with leverage effect in stock returns: Evidence from the Chinese stock market

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  • Long, Ling
  • Tsui, Albert K.
  • Zhang, Zhaoyong

Abstract

In recent years the Chinese stock market has experienced an astonishing growth and unprecedented development, but is also viewed as one of the most volatile markets, which has been called by many observers a “casino”. This study intends to examine the presence of heteroskedasticity and the leverage effect in the Chinese stock markets, and to capture the dynamics of conditional correlation between returns of China's stock markets and those of the U.S. in a bivariate VC-MGARCH framework. The results show that the leverage effect is significant in these markets during the sample period in 2000–2013, and the conditional correlation between mainland China's and the U.S. stock markets is quite low and highly volatile. The Chinese stock markets are found to be highly regimes persistent. These findings have important implication for investors seeking opportunity of portfolio diversification.

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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 37 (2014)
Issue (Month): C ()
Pages: 89-102

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Handle: RePEc:eee:ecmode:v:37:y:2014:i:c:p:89-102
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

Keywords: Stock return; Chinese stock market; Conditional heteroskedasticity; Leverage effect; Regime persistence;

Find related papers by JEL classification:

  • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
  • F31 - International Economics - - International Finance - - - Foreign Exchange
  • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
  • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
  • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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Cited by:

  1. Wang, Xunxiao & Wu, Chongfeng & Xu, Weidong, 2015. "Volatility forecasting: The role of lunch-break returns, overnight returns, trading volume and leverage effects," International Journal of Forecasting, Elsevier, vol. 31(3), pages 609-619.
  2. Hou, Yang & Li, Steven, 2016. "Information transmission between U.S. and China index futures markets: An asymmetric DCC GARCH approach," Economic Modelling, Elsevier, vol. 52(PB), pages 884-897.

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