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Abstract:
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This study on analyzing the volatility of Chinese stock returns has the specific objectives to 1) determine the appropriate econometric model for explaining Chinese stock returns volatility, and 2) predict the volatility of Chinese stock returns. It dealt with the macroeconomic environmental factors that can contribute to the volatility of Chinese stock returns namely Hong Kong dollar to US dollar exchange rate and Chinese yuan to US dollar exchange rate. The investigation was based on daily data during 2012 – 2016, covering 966 observations. GARCH model was employed for predicting Chinese stock returns volatility.
The study found that all data series namely Hangsen stock return, Shenzhen stock return, HKD-USD exchange rate, and CNY-USD exchange rate are stationary for level data or with I(0) order of integration. Among various GARCH models estimated for predicting the return volatility of both Chinese stocks, based on the values of Akaike Information Criterion (AIC) and Schwarz Criterion (SC) for comparison, GARCH (1,1) was found to be the most appropriate model for the case of Hangsen stock. The results of one day ahead prediction for five days indicated the decline in volatility of Hangsen stock returns. Similarly, GARCH (1,1) model appeared to be optimal for predicting the volatility of Shenzhen stock returns with the results of one day ahead prediction for five days demonstrating the decreasing trend of stock returns volatility
Key word: Volatility, Chinese Stock Fund
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