Liquidity and realized volatility prediction in Chinese stock market: A time-varying transitional dynamic perspective

Yanyan Xu, Jing Liu, Feng Ma and Jielei Chu

International Review of Economics & Finance, 2024, vol. 89, issue PA, 543-560

Abstract: Basing on the features of emerging Chinese stock market, this article discusses whether sharply deteriorating liquidity propels the stock market into a “crisis” state and investigates the dynamic impacts of the market liquidity on volatility forecasting. We construct the Markov-switching (MS) liquidity-adjusted HAR models with liquidity from the perspective of time-varying transition probabilities (TVTP). Empirical evidence suggests that a sharp deterioration in liquidity increases the probability of a “crisis” state for China's stock market. Out-of-sample forecasting results demonstrate that our proposed TVTP-MS-HAR-CJ-LIQ model, combining TVTP and MS-HAR-CJ with liquidity, substantially improves the predictive performance. Considering liquidity's impact from the TVTP perspective is suggested for the emerging but attention-attracting Chinese stock market.

Keywords: Realized volatility; Time-varying transition probability; Liquidity; Chinese stock market (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:89:y:2024:i:pa:p:543-560

DOI: 10.1016/j.iref.2023.07.083

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