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Permanent and Transitory Components in the Chinese Stock Market: The ARJI-Trend Model

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  • Shu-Mei Chiang
  • Chin-Piao Yeh
  • Chien-Liang Chiu

Abstract

This study applies the ARJI-trend model in conjunction with the procedure proposed by Bai and Perron (2003) to investigate the coexistence of permanent and transitory components and time-varying jumps in the A and B stock market indices of the Shanghai and Shenzhen Stock Exchanges. Although the response to outside innovations is greater within the transitory component, it is short-lived; conversely, though there is a high level of persistence in the trend, new information has only a lesser effect on the permanent component. Jump variance can also affect total variance, though the effect is far lower than the variance for generalized autoregressive conditional heteroskedasticity. Accordingly, the market risk appears small. The reaction to news is heterogeneous within the Shanghai and Shenzhen indices; this may be the result of various market characteristics. During event periods, the permanent component, transitory components, and jump intensity are larger than their averages. After an upward trend, markets return to regular conditions over time. In sum, the total long-run risks within China's market seem low, though speculators can use the sizable transitory component of market fluctuation to engage in arbitrage activities. However, from the viewpoint of asset allocation regarding the trading noise in the Shenzhen B market, we suggest that rational investors deploy more funds in this market and less in the Shanghai A market to avoid a high degree of risk.

Suggested Citation

  • Shu-Mei Chiang & Chin-Piao Yeh & Chien-Liang Chiu, 2009. "Permanent and Transitory Components in the Chinese Stock Market: The ARJI-Trend Model," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 45(3), pages 35-55, May.
    • Handle: RePEc:mes:emfitr:v:45:y:2009:i:3:p:35-55
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    Citations

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    Cited by:

    1. Cano Berlanga, Sebastian & Giménez Gómez, José M. (José Manuel), 2016. "On Chinese stock markets: How have they evolved along time?," Working Papers 2072/267085, Universitat Rovira i Virgili, Department of Economics.
    2. Sebastián Cano-Berlanga & José-Manuel Giménez-Gómez, 2018. "On Chinese stock markets: How have they evolved over time?," Annals of Operations Research, Springer, vol. 266(1), pages 499-510, July.
    3. Julian, Inchauspe & Helen, Cabalu, 2013. "What Drives the Shanghai Stock Market? An Examination of its Linkage to Macroeconomic Fundamentals," MPRA Paper 93049, University Library of Munich, Germany.
    4. Chiang, Shu-Mei & Chen, Hsin-Fu & Lin, Chi-Tai, 2013. "The spillover effects of the sub-prime mortgage crisis and optimum asset allocation in the BRICV stock markets," Global Finance Journal, Elsevier, vol. 24(1), pages 30-43.
    5. Zhian Chen & Hai Jiang & Donghui Li & Ah Boon Sim, 2010. "Regulation Change and Volatility Spillovers: Evidence from China's Stock Markets," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 46(6), pages 140-157, November.
    6. Lee, Yen-Hsien & Hu, Hsu-Ning & Chiou, Jer-Shiou, 2010. "Jump dynamics with structural breaks for crude oil prices," Energy Economics, Elsevier, vol. 32(2), pages 343-350, March.

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