Research On The Volatility And Correlation Of Sectors In China's A-share Market

Volatility and correlation are two key factors that can not be ignored when allocating assets among sectors in the stock market. The volatility of the sectors reflects risk due to the price (or revenue) changes that faces investors. The correlation reflects linkage effects of the price (or revenue) between sectors. In order to help the securities market participants get a profound understanding of volatility characteristics and related characteristics of the sectors in China's A-share market and help them to fully grasp the market risk when they make a decision, this paper selects the daily return series of CSI Sector Index as the research object which launched on July 3rd,2009. And firstly based on single-variable GARCH model, we estimate the conditional variance of the return of ten sectors indexes to observe the characteristics of the volatility of the sectors. Then based on non-parametric test, we investigate that whether the order of the volatility among sectors is consistent in different periods. Thirdly, we use multi-variable Dynamic Conditional Correlation (DCC) model to measure the correlation coefficients of the return of 10 sectors indexes, and also based on non-parametric test, we investigate whether the order of the correlation coefficients among sectors is consistent in different times.The main conclusions of this paper include:(1) Volatility of different sectors in China's A-share market presented common features of financial time series such as volatility consistence, volatility clustering. And the volatility of different sectors was impacted by the overall stock market by a larger extent. (2) During the past 5 years, the order of the volatility among sectors was consistent in different sub-periods. (3) The correlation among the 10 sectors in China's A-share market changed over time, and all sectors showed a significant positive correlation. The correlation coefficient mostly distributed in the 0.6-0.9. It reflected that there existed greater systemic risk in the China's A-share market to a certain extent. (4) The order of the correlation coefficients among sectors was consistent in different times. It meant that there were always some sectors that were highly relevant while other sectors showed less relevance.