A Market Crash or Tail Risk? Heavy Tails and Asymmetry of Returns in the Chinese Stock Market

Abstract

Rapid stock market growth without real economic back-up has led to the 2015 Chinese Stock Market Crash with thousands of stocks hitting the down limit simultaneously multiple times. The authors provide a detailed analysis of structural breaks in heavy-tailedness and asymmetry properties of returns in Chinese A-share markets due to the crash using recently proposed robust approaches to tail index inference. The empirical analysis points out to heavy-tailedness properties often implying possibly infinite second moments and also focuses on gain/loss asymmetry in the tails of daily returns on individual stocks. The authors further present an analysis of the main determinants of heavy-tailedness in Chinese financial markets. It points out to liquidity and company size as being the most important factors affecting the returns’ heavy-tailedness properties. At the same time, the authors do not observe statistically significant differences in tail indices of the returns on A-shares and the coefficients on factors affecting them in the pre-crisis and post-crisis periods.

Citation

Xing, Z. and Ibragimov, R. (2023), "A Market Crash or Tail Risk? Heavy Tails and Asymmetry of Returns in the Chinese Stock Market", Chang, Y., Lee, S. and Miller, J.I. (Ed.) Essays in Honor of Joon Y. Park: Econometric Methodology in Empirical Applications (Advances in Econometrics, Vol. 45B), Emerald Publishing Limited, Leeds, pp. 181-205. https://doi.org/10.1108/S0731-90532023000045B009