International Volatility Risk and Chinese Stock Return Predictability

42 Pages Posted: 17 Feb 2015 Last revised: 18 Jul 2017

See all articles by Jian Chen

Jian Chen

Xiamen University - School of Economics

Fuwei Jiang

Central University of Finance and Economics (CUFE)

Yangshu Liu

Xiamen University - School of Management

Jun Tu

Singapore Management University - Lee Kong Chian School of Business

Date Written: March 10, 2016

Abstract

This paper investigates the predictive ability of international volatility risk for the daily aggregate Chinese stock market returns. We employ the innovations in implied volatility indices of seven major international markets as our international volatility risk proxies. We find that international volatility risks are negatively associated with contemporaneous Chinese daily overnight stock returns, while positively forecast next-day Chinese daytime stock returns. The US volatility risk (DVIX) is particularly powerful in forecasting Chinese daytime stock returns, and plays a dominant role relative to the other six international volatility measures. DVIX’s forecasting power remains strong after controlling for Chinese domestic volatility and is robust in- and out-of-sample. Economically, high DVIX forecasts high Chinese domestic market volatility, low trading activity, and low market liquidity, indicating that both ICAPM and liquidity risk help to explain international volatility risks’ predictive power for Chinese stock returns.

Keywords: Return Predictability, Implied Volatility, Out-of-sample Forecasting, Chinese Stock

JEL Classification: C22, C53, G11, G12, G17

Suggested Citation

Chen, Jian and Jiang, Fuwei and Liu, Yangshu and Tu, Jun, International Volatility Risk and Chinese Stock Return Predictability (March 10, 2016). Journal of International Money and Finance, 2017, Vol. 70, 183-203, Available at SSRN: https://ssrn.com/abstract=2564655 or http://dx.doi.org/10.2139/ssrn.2564655

Jian Chen (Contact Author)

Xiamen University - School of Economics ( email )

422 Siming Nan Road
Xiamen, Fujian 361005
China

Fuwei Jiang

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

Yangshu Liu

Xiamen University - School of Management ( email )

No.422 Siming Nan Road
Xiamen, Fujian 361005
China

Jun Tu

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
#04-01
Singapore, 178899
Singapore

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