The Idiosyncratic Risk in Chinese Stock Market

Abstract

Using daily stock return data of all listed firms in Chinese stock market from 1998 to 2018, we disaggregate the volatility of common stocks at the market, industry and firm levels. We find market volatility, on average, is the highest while firm volatility tends to lead to market and industry volatility series. None long-term trend time series behaviour exists for all three volatility series and firm volatility is best described by an autoregressive process with regime shifts associated with the structural market reforms or volatile market movements. We further proceed to identify the source of volatility at the industry level and find the idiosyncratic volatility in the largest manufacturing industry not only accounts for the largest proportion in the aggregate firm volatility but also is the lead indicator for the idiosyncratic volatility of other industries. Finally, unlike Brandt et al. [Review of Financial Studies 23(2): 863-899 (2010)], we find the idiosyncratic volatility in Chinese stock market is associated with high stock trading activities by institutional investors, the result of which is also robust when using other measures of idiosyncratic volatility.

Can market risk explain the systemic risk? Evidence from the US banking industry

“…For example, during the 2008 financial crisis, the failure of individual institutions resulted in a systemic shock that spread throughout the financial system and led to the collapse of many other financial institutions. Our results for the US banking sector confirm the relationship between idiosyncratic and systemic risks, while these are in line with previous findings for the Chinese stock market (Darby et al ., 2019).…”