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Forecasting China's stock market variance

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  • Cheng, Hang
  • Shi, Yongdong

Abstract

We conduct a comprehensive study on the prediction of China's stock market variance using 24 commonly used forecasting variables over the 1995 to 2018 period. The empirical evidence from both the formal variable selection procedure, LASSO, and the out-of-sample test indicates that lagged stock market variance, the Pástor and Stambaugh (2003) illiquidity measure, and aggregate turnover have statistically significant predictive power, while the other variables contain little additional information about future market variance. In contrast with the conventional wisdom, we document an unstable relation between the scaled stock market price and market variance.

Suggested Citation

  • Cheng, Hang & Shi, Yongdong, 2020. "Forecasting China's stock market variance," Pacific-Basin Finance Journal, Elsevier, vol. 64(C).
    • Handle: RePEc:eee:pacfin:v:64:y:2020:i:c:s0927538x19304950
    DOI: 10.1016/j.pacfin.2020.101421
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    1. Zhang, Yaojie & Song, Bingheng & He, Mengxi & Wang, Yudong, 2024. "Abnormal temperature and the cross-section of stock returns in China," International Review of Financial Analysis, Elsevier, vol. 94(C).

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    More about this item

    Keywords

    China's stock market; Time-varying stock market variance; Conditional variance; Realized variance; LASSO; Out-of-sample;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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