Forecasting Volatility with Price Limit Hits—Evidence from Chinese Stock Market

Xiaojun Chu and Jianying Qiu

Emerging Markets Finance and Trade, 2019, vol. 55, issue 5, 1034-1050

Abstract: In this article, we discuss whether price limit hits (PLH) contain information for volatility forecasting. Using Chinese stock market as sample, we find that PLH display significant forecasting power for future volatilities. Furthermore, the predictive effects on volatility are asymmetric between upper price limit hits (UPLH) and lower price limit hits (LPLH), with more pronounced effect for LPLH. These results are robust after controlling for jump, leverage effect, and volume in HAR-RV models, and they hold in crisis sub-sample and other measures of PLH. Finally, we provide a possible explanation for the predictive ability of PLH and suggest that the number of PLH can be used as a proxy for investor sentiment.

Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:mes:emfitr:v:55:y:2019:i:5:p:1034-1050

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DOI: 10.1080/1540496X.2018.1532888

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