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CSI300Index Volatility Based on GARCH Model Analysis

Author: ZhaoLi
Tutor: GaoHui
School: Chengdu University of Technology
Course: Business management
Keywords: Stock index futures volatility ARCH model GARCH Empirical
CLC: F224
Type: Master's thesis
Year: 2012
Downloads: 885
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Abstract

The stock market is always changing and is full of uncertainty. Nowadays，rapid dissemination of information and rapid flow of capital will make the stock pricechanging. Changes in stock prices will also affect the market; the two mutuallyinfluence each other. Volatility is an important indicator to measure the quality andefficiency of the stock market. Fluctuations within the normal amplitude range isconducive to an active market, however, too frequent and large fluctuations willincrease the market risk, impact on investor judgment and is not conducive to thegood functioning of the market. China’s stock market is an emerging market range,and is often volatile, frequent ups and downs. Fluctuations in high-risk characteristicsare also very common phenomenon. These are the most representative characteristicsof China’s stock market. Especially after the split share structure reform, thenon-tradable shares gradually into tradable shares, this shift increase the volatility ofChina’s market. Market volatility in China is violent. This excessive volatility canseriously affect our financial system and our national economy. Therefore, to studyChina’s Shanghai and Shenzhen stock volatility characteristics are of great practicalsignificance for government management and the majority of investors. Includingvolatility asymmetry, market leverage effect, and this article focus on research ofChina’s Shanghai and Shenzhen stock volatility characteristics. Because CSI300reflects stock price changes in China’s securities market, as well as the generalsituation of China’s stock market run, in addition, it is China’s investmentperformance reference index and the evaluation criteria, and is the base of thedevelopment of indexation investment and indexation of financial derivatives, thispaper selects the Shanghai and Shenzhen300Index as a research object. Especiallyafter the launch of China’s stock index futures, stock market had a true sense of theshort mechanism. Then, studying the subject matter of the stock index futures-theCSI300Index volatility is representative. The research draws on the literature in the developed market, and describes thecharacteristics of the volatility from the perspective of econometric analysis by usingGARCH models. With Eviews3.1measurement analysis software, the author tests thechanges of CSI300Index volatility. The research on China’s CSI300Index, ismainly from four aspects. The first part is the Introduction, first examine thebackground and significance of the research content, indicating the theoreticalsignificance and practical significance of the study, and demonstrating the necessityfor research. The second part is a synthesis of relevant theory. On the basis of the firstchapter, this part introduces the theory and empirical results on the representative ofthe stock index and stock index futures volatility at home and abroad. The authorreviewed the domestic and foreign literature, grasp the current situation of thisproblem, and make brief evaluate. The aforementioned literature review is as thepremise of the paper studies. The third part is the theoretical model and empiricalanalysis. Study the issue must be necessary to correctly apply the theoreticalknowledge in order to obtain theoretical support, then the conclusion is convincing. Inthe theoretical model, the author described the ARCH model, GARCH model’sdefinition and character. Further, based on the model of the defect, the authorextended form of the model (including EGARCH model, TARCH model andGARCH-M model). Then, the closing prices of CSI300Index from October30,2006to April19,2012are selected as the original data, totaled1332data samples. Theauthor conduct a descriptive statistical analysis, the stationary test of the return series,the ARCH effect test, and base on test results, use Eiews3.1software to establish aGARCH model for empirical analysis. The last section is conclusion and policyrecommendations. According to the analysis, the author make appropriate policyrecommendations.The results show that: from time series, CSI300Index volatility showingsignificant variability and clustering. The sequence distribution of the fat tailcharacteristics, and there is a significant GARCH effect, show that the impact of pastfluctuations in the future is a gradual decay. The CSI300Index frequent tradingmakes the stock index futures market with high liquidity, and the high liquidity is oneof the major causes of the index volatility. There is a significant GARCH-M effect,indicating that income has a positive risk premium. This shows that the stock marketis full of speculation atmosphere. Obviously, most investors is in short-terminvestment preferences. China’s financial market is policy-oriented, it is not mature.This also shows that our investors’ sense of investment has not yet focus on value investing, and the market also rely on long-term policy adjustment. CSI300Indexyield significant leverage through the establishment of the TARCH model andEARCH model. This reflects the fluctuations caused by the bad news on the stockindex futures market in China is greater than the fluctuations caused by the good news.CSI300Index implements the T+0trading, and the investor can do two-way, do moreor short trade. This makes retail investors to irrational speculation psychological. It isthe important reasons of the fluctuations.There is a significant positive correlation between the Shanghai and Shenzhenstock daily return and volatility. The fluctuations is in the clustering of characteristics,this is fully demonstrates the short-term fluctuations occupy the mainstream of theChina’s stock market. Therefore, the government should strengthen the supervision oflisted companies; strengthen the disclosure of the extent and intensity. Low efficiencyof the market information makes the stock value function and optimal allocation ofresources functions is difficult to give full play to. Information disclosure system, canmaking the stock market basic information to fully complete spread, giving full playto the role of the market to build an information transmission mechanism, andreducing market speculation atmosphere. It is necessary to strengthen investor riskeducation, advocacy rational investment philosophy. It laid a solid foundation for themajority of investors the right investment philosophy. At the same time, our riskmanagement system is not perfect; some large speculators can easily motivated byprofit, trying to use their own strength and other advantages to the illegal marketmanipulation. Such violations may disturb the market order, result in unfaircompetition, and damage the interests of other traders. The high-risk of stock indexfutures market prompt more attention to risk management systems. Protect investors’legitimate rights and interests, specifically, in addition to the deposit system, the limitsystem, the reporting system of large positions, position limits regime, forcedliquidation system, forced to lighten up system is also necessary to avoid excessivefluctuations. Finally, the market building should be strengthened. The government notto interfere unduly with the securities market, China’s securities market is theprevalence of the phenomenon. When higher degrees of stock market bubble, thegovernment releases the bad news. While the stock market in the economic downturn,the government will release the bailout news, causing stock market rebound. Theadministrative act‘s direct intervention distorts the relationship between supply anddemand, also had a great influence on volatility. As the administrative department, itspowers and responsibilities should be clear, and the focus should be on the regulation and punishment of illegal activities, and the building of a fair, open and notarizedmarket trading order. The policy must have consistency and predictability, to avoidexcessive administrative act on market volatility, and to avoid the formation of a‘policy market’, which allows investors to focus on policy profit, rather than onmarket information and value analysis. The introduction of stock index futures is not along time, corresponding laws and regulations of this specification is not perfect.Driven by the interests of illegal behavior, speculators may conduct illegal behavior.Such behavior would seriously disturb the market order; distort the price-discoveryfunction and the resource allocation function. Therefore, the needs to vigorouslystrengthen the construction of the legal system, standardize the behavior of the partiesto the transaction, and improve management effectiveness.

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