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Forecasting the volatility of Chinese stock market: An international volatility index
Ist Teil von
International journal of finance and economics, 2021-01, Vol.26 (1), p.1336-1350
Ort / Verlag
Chichester, UK: John Wiley & Sons, Ltd
Erscheinungsjahr
2021
Link zum Volltext
Quelle
Wiley Online Library Journals Frontfile Complete
Beschreibungen/Notizen
To forecast the volatility of Chinese stock market, we use information from 28 international markets rather than relying on the Chinese market alone. A common factor, which we call the international volatility index, is constructed by the first principal component of all the 28 cross‐national stock market volatilities. We then add the international volatility index into the prevailing heterogeneous autoregressive model of realized volatility (HAR‐RV). The in‐sample estimation results show that the impact of this common index on future Chinese market volatility is statistically significant and positive. More importantly, the out‐of‐sample forecasting results suggest that our proposed model outperforms competing models including the HAR‐RV, kitchen sink model, and combination approaches. The results are similar when we use a wide range of robustness checks. Furthermore, the international volatility index also yields the highest economic value from an asset allocation perspective.