Working Paper: CEPR ID: DP12180
Authors: Eric Ghysels; Hanwei Liu
Abstract: The Chinese economy has gained a more significant role on the world stage. As a consequence, a wide range of investors, both domestic and foreign, have paid more attention to the Chinese stock market. One focal point has been the downside risk, in particular in light of the large price movements and the regulatory changes which took place over time. In this paper we study the pattern of downside risks using the 1\% and 5\% conditional quantiles of the equity index returns. One of our ultimate goals is to provide an objective assessment of the regulatory policy changes and government actions in the Chinese market. We discover several break dates linked to major financial crises and trading reforms put forth by the China Securities Regulatory Commission. Furthermore, our findings indicate that breaks in the B shares and the H shares downside risk tend to appear earlier than those corresponding to the A shares returns. Lastly, the revised Qualified Foreign Institutional Investor (QFII) program in 2006 and government share purchasing actions in 2015 have shown to be effective at alleviating downside risks in the Shanghai A shares.
Keywords: Downside Risk; Chinese Stock Market; QFII Program
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| regulatory changes and government actions (G18) | downside risk in Shanghai A shares (G17) |
| revised QFII program in 2006 (G23) | downside risk in Shanghai A shares (G17) |
| government share purchasing in 2015 (H57) | downside risk in Shanghai A shares (G17) |
| breaks in downside risk for B shares (G12) | breaks in downside risk for A shares (G17) |
| breaks in downside risk for H shares (G17) | breaks in downside risk for A shares (G17) |
| increases in daily absolute returns (G12) | increased downside risk (D81) |