Financial stress and returns predictability: Fresh evidence from China

Yongan Xu, Chao Liang and Jianqiong Wang

Pacific-Basin Finance Journal, 2023, vol. 78, issue C

Abstract: Our paper examines the implication of the China financial stress index (CNFSI) constructed by Park and Mercado (2014) on asset pricing. First, the CNFSI has a significant negative relationship with subsequent stock market returns, the statistics of in-sample R2 and out-of-sample ROS2 estimated by the predictive regression model are 5.078% and 5.881%, respectively. Second, from the statistical evidence, the predictive effect of the CNFSI is significantly better than that of popular macroeconomic variables and other existing financial stress indices for both in- and out-of-sample periods. Third, according to the results of a long-horizon analysis, the CNFSI has better predictive power for returns during bull markets than during bear markets. Finally, these interesting results are verified by a set of robustness tests.

Keywords: Financial stress; Chinese stock market; Stock return; Forecasting (search for similar items in EconPapers)
JEL-codes: G11 G12 G17 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:78:y:2023:i:c:s0927538x2300046x

DOI: 10.1016/j.pacfin.2023.101980

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