Volatility Patterns of Industrial Stock Price Indices in the Chinese Stock Market

Abstract

This paper will use real data from the Shenzhen Stock Exchange to investigate the ranking stability of short run volatilities of industrial stock price indices. Four well-constructed volatility measures are used to estimate the industrial short run volatilities, with total volatilities being decomposed into industry-unique and market-related components. The method of Kendall’s coefficient of concordance is utilized to test whether the cross-sectional volatility ranking of industrial indices remains stable over time. Empirical results show that in the Chinese stock market, the ranking of total volatilities of industrial indices is consistent from period to period, and that the ranking of market-related volatilities is not stable while the ranking of industry-unique parts is highly and significantly consistent. Tests inside manufacturing show there is a significant volatility structure of sub-industries in manufacturing. This sort of inter-industry volatility pattern provides useful information for a deeper understanding of the Chinese stock market and for constructing investment strategies in the Chinese market.