Forecasting the Chinese stock market volatility with international market volatilities: The role of regime switching

Yaojie Zhang, Likun Lei and Yu Wei

The North American Journal of Economics and Finance, 2020, vol. 52, issue C

Abstract: The purpose of this paper is to investigate the role of regime switching in the prediction of the Chinese stock market volatility with international market volatilities. Our work is based on the heterogeneous autoregressive (HAR) model and we further extend this simple benchmark model by incorporating an individual volatility measure from 27 international stock markets. The in-sample estimation results show that the transition probabilities are significant and the high volatility regime exhibits substantially higher volatility level than the low volatility regime. The out-of-sample forecasting results based on the Diebold-Mariano (DM) test suggest that the regime switching models consistently outperform their original counterparts with respect to not only the HAR and its extended models but also the five used combination approaches. In addition to point accuracy, the regime switching models also exhibit substantially higher directional accuracy. Furthermore, compared to time-varying parameter, Markov regime switching is found to be a more efficient way to process the volatility information in the changing world. Our results are also robust to alternative evaluation methods, various loss functions, alternative volatility estimators, various sample periods, and various settings of Markov regime switching. Finally, we provide an extension of forecasting aggregate market volatility on monthly frequency and observe mixed results.

Keywords: Volatility forecasting; Chinese stock market; International markets; HAR model; Regime switching (search for similar items in EconPapers)
JEL-codes: C53 C58 F37 G17 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:52:y:2020:i:c:s1062940819302293

DOI: 10.1016/j.najef.2020.101145

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