Chinese Stock Market Volatility and the Role of U.S. Economic Variables

37 Pages Posted: 4 May 2016 Last revised: 17 Jul 2017

See all articles by Jian Chen

Jian Chen

Xiamen University - School of Economics

Fuwei Jiang

Central University of Finance and Economics (CUFE)

Hongyi Li

The Chinese University of Hong Kong

Weidong Xu

Zhejiang University - School of Management

Date Written: September 4, 2015

Abstract

This paper investigates the effects of U.S. economic variables on the time variation of Chinese stock market volatility. We find that several 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 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.

Keywords: Volatility Forecasting, U.S. Economic Variables, Out-of-sample Forecasting, Combination Forecast, Chinese Stock Market

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

Suggested Citation

Chen, Jian and Jiang, Fuwei and Li, Hongyi and Xu, Weidong, Chinese Stock Market Volatility and the Role of U.S. Economic Variables (September 4, 2015). Pacific-Basin Finance Journal, 2016, No. 39, 70-83, Available at SSRN: https://ssrn.com/abstract=2774819

Jian Chen

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

Hongyi Li

The Chinese University of Hong Kong

Hong Kong
Hong Kong

Weidong Xu (Contact Author)

Zhejiang University - School of Management ( email )

Hangzhou, Zhejiang Province 310058
China

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