Political uncertainty, realized volatility, and jumps in the Chinese stock market

ABSTRACT

This study investigates the impact of the local political uncertainty (LPU) on one-step-ahead volatility in the Chinese stock market using high-frequency data. The empirical findings indicate that the LPU generates a significant negative impact on future realized volatility and its continuous and jump components. Further tests show that the LPU’s impact is more pronounced in politically sensitive firms. The study finds that LPU’s negative impact could be explained by its inhibition effect on investors’ trading volume. We also find evidence of institutional investors’ secret buying behaviour during the LPU period.

KEYWORDS:

• Realized volatility
• jump
• political uncertainty
• trading volume
• order imbalance

JEL CLASSIFICATION:

• C23
• D80
• E60
• G10

Acknowledgments

We thank the financial support from the China National Natural Science Foundation (CNNSF, grant no. 71602054), Hunan Province Natural Science Foundation of China (grant no. 2017JJ3043), all errors are ours.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ A strong political atmospheric denotes a powerful government, a gigantic and elaborate political propaganda system, and the culture of obedience to political authority in China. An immature market implies poor corporate governance and an opaque information disclosure environment, retail investors dominated investor structure, and an administrative governance mode. This renders the Chinese capital market a volatile market and amplifies the political uncertainty’s impact.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [71602054]; Natural Science Foundation of Hunan Province [2017JJ3043]; National Natural Science Foundation of China [71602054]; Natural Science Foundation of Hunan Province [2017JJ3043].