Abstract
Against the backdrop of increasing interest in factor investing, this paper explores volatility connectedness among theme factors and sector indices in the Chinese stock market using the Diebold-Yilmaz approach with quantile factor VAR. Our static analysis reveals significant similarities at extreme quantiles, contrasting with the conditional median. We find that higher connectedness measures at extreme quantiles correspond to improved performance of portfolios based on sectors and themes. Additionally, dynamic analysis indicates a strong link between total connectedness and closely tied risk events in China. Moreover, variations in connectedness between the right and left tails serve as a market-level risk proxy, significantly influencing the performance of both themes and sectors. These findings underscore the importance of understanding volatility connectedness for devising effective investment strategies and enhancing risk management practices in the Chinese stock market.
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