Publication Type

Journal Article

Version

acceptedVersion

Publication Date

2-2017

Abstract

This paper investigates the predictive ability of international volatility risks for the daily Chinese stock market returns. We employ the innovations in implied volatility indexes 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 (ΔVIX) is particularly powerful in forecasting Chinese stock returns, and plays a dominant role relative to the other six international volatility measures. ΔVIX's forecasting power remains strong after controlling for Chinese domestic volatility and is robust in- and out-of-sample. Economically, high ΔVIX 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, Chinese stock market, ICAPM, Liquidity risk

Discipline

Asian Studies | Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Finance

Publication

Journal of International Money and Finance

Volume

70

First Page

183

Last Page

203

ISSN

0261-5606

Identifier

10.1016/j.jimonfin.2016.08.007

Publisher

Elsevier

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.1016/j.jimonfin.2016.08.007

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