Disaggregate Volatility Components And Their Trends: An Empirical Study In Chinese Stock Market

Volatility measures risks in the capital market and involved in certain financial assets, therefore it is regarded in Financial Research as of crucial importance both in theoretical analysis and in empirical studies. The aggregated volatility of a stock comprises two important components, market volatility and firm-level volatility. Market volatility reflects the quality of the stock market while the firm-level volatility can be used to assess a listed company. Thus the study of the market volatility is of great meaning in evaluating the more-than-ten-year's development of Chinese stock market, as well as in shaping the course of further growth of the market. In the meanwhile, the study of firm-level volatility will serve investments in real cases.However, in existing researches, foreign and especially domestic, there are few papers employ the disaggregate method on volatility to study these different components of volatility due to the difficulty in estimating their values, which results in the lack of a comprehensive understanding of the situation in Chinese stock market. In this context, this paper established a convenient model as a disaggregated approach, by which the components of aggregated volatility are easy to estimate, to study the volatility in Chinese stock market. With this approach, an empirical study on all listed A-stocks in Chinese market during the past 12 years is conducted and both the market risk and idiosyncratic risk is analyzed. By using various econometric methods, a downward deterministic trend is detected in market volatility indicating the decrease of market risk over 1990 to 2001, while no deterministic trend is found in firm-level volatility.Furthermore, according to the status of Chinese market, this paper established an information asymmetry model to explain the source of such a deterministic trend in market volatility. It is considered that the improvement of information asymmetry is the main reason of the trend, and other possible factors are also suggested.This paper also further studied the characteristics of different volatility components and based on which a comparison between Chinese stock market and developed stock market is proceeded. The disadvantage of Chinese market is pointed out and the misunderstanding due to the lack of thorough knowledge on disaggregated volatility is corrected as well. Moreover, this paper analyzed the impact of decreasing market volatility on the stock portfolios, which is meaningful to real-world investments.Last but not least, this paper made some practical suggestions to order to improve Chinese stock market and control the risk in it based on fore-described studies. And some further research directions are also proposed.