Speaker: Dr.Qian Chen(Peking University ShenZhen Graduate School)

Title: Modelling the Long-term Component of the Volatility in China’s Stock and Bond Market with Macro Factors: Based on GARCH-MIDAS

Time: Sun, Dec.9, 2018 , AM:10:00-11:00

Location: Room 4318, Building No.4, Wushan Campus

Abstract：          

This paper applies the GARCH-MIDAS-X models to China’s stock and bond market in attempt to examine the power of low-frequency macro factors in predicting high-frequency market volatility. The results confirm the significant relationship between the macro variables and the long run volatility. Specifically, the long-run component of GARCH-MIDAS model incorporatingindustrial added value growth rate (IP) accounts for around 30% of total conditional volatility of China’s stock market and bond market. The study also findsthat, industrial added value is a better predictor than theproducer price index, which may be due to the fact that the China’s economy is still in the developmentstage and the market is more sensitive to economic growth than inflation. The out-of-sample forecasts of GARCH-MIDAS-X models improve with longer horizons. Though for the stock market, GARCH-MIDAS-RV stillperforms best in semi-annual horizon; for bond, GARCH-MIDAS with IP volatility outperformsother models in semi-annual horizon. DCC-MIDAS-X is also applied to study the relationship between the macro factors and the stock–bond correlation. The results suggest a weaker effect of the macro factors, which may be due to theabsence of inter-market macro-strategy investors in China.