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Quantile volatility connectedness among themes and sectors: Novel evidence from China

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  • Zhou, Bin
  • Shi, Huai-Long

Abstract

Against the backdrop of increasing interest in factor investing, this paper explores volatility connectedness among theme factors and sector indices in the Chinese stock market using the Diebold-Yilmaz approach with quantile factor VAR. Our static analysis reveals significant similarities at extreme quantiles, contrasting with the conditional median. We find that higher connectedness measures at extreme quantiles correspond to improved performance of portfolios based on sectors and themes. Additionally, dynamic analysis indicates a strong link between total connectedness and major risk events in China. Moreover, variations in connectedness between the right and left tails serve as a market-level risk proxy, significantly influencing the performance of both themes and sectors. These findings underscore the importance of understanding volatility connectedness for devising effective investment strategies and enhancing risk management practices in the Chinese stock market.

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  • Zhou, Bin & Shi, Huai-Long, 2024. "Quantile volatility connectedness among themes and sectors: Novel evidence from China," The Quarterly Review of Economics and Finance, Elsevier, vol. 98(C).
    • Handle: RePEc:eee:quaeco:v:98:y:2024:i:c:s1062976924001431
    DOI: 10.1016/j.qref.2024.101937
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    More about this item

    Keywords

    Volatility connectedness; Quantile regression; Sector index; Theme factor;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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