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Chinese stock market volatility and the role of U.S. economic variables

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  • Chen, Jian
  • Jiang, Fuwei
  • Li, Hongyi
  • Xu, Weidong

Abstract

This paper investigates the effects of U.S. economic variables on the time variation of Chinese stock market volatility. We find that U.S. economic variables such as the dividend price ratio, dividend yield and industrial production strongly forecast the future monthly volatilities of the Chinese stock market. The predictability is statistically and economically significant and can be further improved when combining the information in all U.S. economic variables together. Forecast encompassing tests and regression tests show that the forecasting power of U.S. economic variables is incremental when comparing with the Chinese domestic economic variables. Our findings are robust for the out-of-sample analysis and a number of Chinese industry portfolios volatilities.

Suggested Citation

  • Chen, Jian & Jiang, Fuwei & Li, Hongyi & Xu, Weidong, 2016. "Chinese stock market volatility and the role of U.S. economic variables," Pacific-Basin Finance Journal, Elsevier, vol. 39(C), pages 70-83.
    • Handle: RePEc:eee:pacfin:v:39:y:2016:i:c:p:70-83
    DOI: 10.1016/j.pacfin.2016.05.013
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    25. Shen, Lihua & Lu, Xinjie & Luu Duc Huynh, Toan & Liang, Chao, 2023. "Air quality index and the Chinese stock market volatility: Evidence from both market and sector indices," International Review of Economics & Finance, Elsevier, vol. 84(C), pages 224-239.

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    More about this item

    Keywords

    Volatility forecasting; U.S. economic variables; Out-of-sample forecasting; Combination forecast; Chinese stock market;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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