The Idiosyncratic Risk in Chinese Stock Market

36 Pages Posted: 24 Jun 2019

See all articles by Julia Darby

Julia Darby

University of Strathclyde, Glasgow - Strathclyde Business School - Department of Economics

Hai Zhang

Strathclyde Business School

Jinkai Zhang

University of Strathclyde

Date Written: June 24, 2019

Abstract

Using daily stock return data of all listed firms in Chinese stock market from 1998 to 2018, we disaggregate the volatility of common stocks at the market, industry and firm levels. We find market volatility, on average, is the highest while firm volatility tends to lead to market and industry volatility series. None long-term trend time series behaviour exists for all three volatility series and firm volatility is best described by an autoregressive process with regime shifts associated with the structural market reforms or volatile market movements. We further proceed to identify the source of volatility at the industry level and find the idiosyncratic volatility in the largest manufacturing industry not only accounts for the largest proportion in the aggregate firm volatility but also is the lead indicator for the idiosyncratic volatility of other industries. Finally, unlike Brandt et al. [Review of Financial Studies 23(2): 863-899 (2010)], we find the idiosyncratic volatility in Chinese stock market is associated with high stock trading activities by institutional investors, the result of which is also robust when using other measures of idiosyncratic volatility.

Keywords: Volatility decomposition; Regime-switching, Volatility dynamics, Idiosyncratic volatility, Institutional trading behavior

JEL Classification: : G11, G12, G14, G18

Suggested Citation

Darby, Julia and Zhang, Hai and ZHANG, JINKAI, The Idiosyncratic Risk in Chinese Stock Market (June 24, 2019). Available at SSRN: https://ssrn.com/abstract=3409074 or http://dx.doi.org/10.2139/ssrn.3409074

Julia Darby

University of Strathclyde, Glasgow - Strathclyde Business School - Department of Economics ( email )

Sir William Duncan Building
130 Rottenrow
Glasgow, G4 0GE
United Kingdom

HOME PAGE: http://www.economics.strath.ac.uk/julia/

Hai Zhang (Contact Author)

Strathclyde Business School ( email )

199 Cathedral Street
Glasgow G4 0QU
United Kingdom

JINKAI ZHANG

University of Strathclyde ( email )

100 Cathedral Street
Glasgow G4 0LN
United Kingdom

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