Market momentum amplifies market volatility risk: Evidence from China’s equity market

Chao Liang, Luu Duc Toan Huynh and Yan Li

Journal of International Financial Markets, Institutions and Money, 2023, vol. 88, issue C

Abstract: We examine the role of a belief-based momentum indicator, measured by conditional past returns (CPR), in the realized volatility (RV) predictability of equity markets. Based on the week- and month-horizon CPR, we construct the HAR-CPR and HAR-LCPR models on the basis HAR-RV model. Here, the HAR-LCPR model additionally includes the daily leverage factor in the absence of daily CPR. In China, we find that: 1) week- and month-horizon CPR have significantly positive impacts on one-, five-, and 22-days-ahead RVs; 2) our out-of-sample results further indicate that the HAR-LCPR model performs best in forecasting one- and five-days-ahead RVs, whereas the HAR-CPR model is a more reliable forecasting model for 22-days-ahead volatility; 3) the performance also passes various robustness tests, including sub-period performance testing, alternative training rolling window, and alternative RV estimation. We show the economic mechanism underlying the predictive role of CPR from the perspective of investors’ trading activities.

Keywords: Volatility forecasting; Realized volatility; Conditional past returns; HAR; Leverage effect; COVID-19; Global financial crisis (search for similar items in EconPapers)
JEL-codes: C22 C51 C52 C53 G14 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:88:y:2023:i:c:s1042443123001245

DOI: 10.1016/j.intfin.2023.101856

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