An Empirical Study On The Decomposition Of The Volatility Of Chinese Stock Market

As a measure of market risk, volatility directly affects asset pricing, asset allocation and risk management. First, portfolio volatility means the risk of the portfolio, and the risk makes the investors to determine the key factors to be considered in optimal portfolio. Second, investors’inconsistent attitude leads to the generation of risk trading, and a certain degree of risk trading is the trading volatility. If traders expect to gain and use of financial derivatives for risk management and control, it is necessary to study the nature of volatility.However, in existing researches, foreign and especially domestic, there are few papers employ the disaggregate method in 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 market stock market. With this approach, an empirical study on GEM market during the past4years is conducted and both the market risk and idiosyncratic risk is analyzed. By using various econometric methods, a downward deterministic trend is detected in firm-level volatility, while no deterministic trend is found in market risk.According the characteristics of Chinese stock market volatility, further analysis of the risk is made. And on the basis of the findings, we make a simple comparison with the mature markets, and point out that deficiency of Chinese GEM market.Finally, we discuss the influence of economic variables to component volatility on the stock market. Combined with the previous studies, we make some suggestions to improve Chinese GEM market and reduce investment risk. And some further research directions are also proposed.