The reverse volatility asymmetry in Chinese financial market

Die Wan, Ke Cheng and Xiaoguang Yang

Applied Financial Economics, 2014, vol. 24, issue 24, 1555-1575

Abstract: We investigate the intraday return-volatility correlation in Chinese financial market with high-frequency transaction data of individual stocks. In contrast to the widely accepted theory of volatility asymmetry (i.e. negative returns induce higher price volatilities than positive ones), we show that the price volatilities in Chinese market react more intensively to positive returns than their reaction to negative returns. This reverse volatility asymmetry is mainly due to the higher trading volume associated with positive returns, that is, in Chinese market the investors' rushing for a price rising stock makes the positive returns arouse higher volatility than their negative counterparts. So in an average sense, a positive return-volatility correlation is observed for most of the individual stocks in our sample. Besides, price jumps play an important role in the significance of this positive correlation. For most of the individual stocks in our sample, the positive correlation is insignificant until jumps are totally eliminated in both return and volatility. For multiple stocks analysed together, the jumps of individual stocks are mostly diversified, and therefore a significant positive return-volatility correlation shows up irrespective of the existence of jumps. Moreover, our results are robust in different market conditions, no matter in depression or flourish.

Date: 2014
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DOI: 10.1080/09603107.2013.818208

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