Analysis on the Leverage Effect of Stock Market in China and America

Abstract

Volatility in the stock market as a significant standard is always used in the risk assessment field. Among them, asymmetry is the main feature of stock market volatility, and the leverage effect is one of the important mechanisms of asymmetry. It is of positive practical significance to study the leverage effect of stock market volatility in the open economy. In order to make volatility research more quantitative, economists proposed the ARCH model and continuously modified and innovated it, which expanded to the ARCH family model. This essay selected the 10 years of data (from 2012 to 2022) of the Shanghai Composite Index and the S&P500 Index that represent China's stock market and the American stock market, respectively, based on the EGARCH model, one of the ARCH family models, to analyze their volatility and by using Eview12.0 to build the EGARCH model to assess the leverage effect for both markets and compare the two market differences. As a result, it illustrates that both markets have significant leverage effects and the investors in two markets have obvious "herd behavior". Based on this empirical conclusion, the paper finally puts forward the corresponding policy suggestions for the government and stock investors.