Downside Risk in the Chinese Stock Market - Has it Fundamentally Changed?

Eric Ghysels and Hanwei Liu

No 12180, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The Chinese economy has gained a more significant role on the world stage. As a consequence, a wide range of investors, both domestic and foreign, have paid more attention to the Chinese stock market. One focal point has been the downside risk, in particular in light of the large price movements and the regulatory changes which took place over time. In this paper we study the pattern of downside risks using the 1\% and 5\% conditional quantiles of the equity index returns. One of our ultimate goals is to provide an objective assessment of the regulatory policy changes and government actions in the Chinese market. We discover several break dates linked to major financial crises and trading reforms put forth by the China Securities Regulatory Commission. Furthermore, our findings indicate that breaks in the B shares and the H shares downside risk tend to appear earlier than those corresponding to the A shares returns. Lastly, the revised Qualified Foreign Institutional Investor (QFII) program in 2006 and government share purchasing actions in 2015 have shown to be effective at alleviating downside risks in the Shanghai A shares.

Date: 2017-07
New Economics Papers: this item is included in nep-fmk, nep-rmg and nep-tra
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