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Volatility Switching in Shanghai Stock Exchange: Does regulation help reduce volatility?

Zhang, Dayong and Dickinson, David and Barassi, Marco (2008): Volatility Switching in Shanghai Stock Exchange: Does regulation help reduce volatility?

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Abstract

This paper investigates volatility switching in the Shanghai Stock Exchange (SSE hereafter,) using several recently developed techniques. They can be categorized into CUSUM type tests and Markov-Switching ARCH models. By detecting and dating switches with these models, we are able to show the volatility dynamics in SSE. Investigating the events in SSE around the switching date suggests that regulation improvements significantly reduce the volatility of the underlying market. Furthermore, the empirical results show that outliers can have significant impact on the conclusion and thus should properly be removed.

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