Estimating stochastic volatility models of stock returns in Chinese markets

Abstract

Volatility plays a key role in microstructure issues in the study of financial markets. Stochastic volatility (SV) models have been applied to the study of the behavior of financial variables. Two stock markets exist in China: Shanghai Stock Exchange and Shenzhen Stock Exchange. As emerging stock markets, investors are increasingly concerned about the volatilities of these two stock markets. We briefly introduce how to estimate SV models using the Markov chain Monte Carlo (MCMC) method. In order to do full and comprehensive analyses of the volatilities of stock returns, we estimated SV models using most of the historical data and the different data frequencies of the two Chinese markets. We found that estimated values of volatility parameters are very high for all data frequencies. This suggests that stock returns are extremely volatile even at long-term intervals in Chinese markets.