Review 3

Pacific-Basin Finance Journal 65 (2021) 101466
Contents lists available at ScienceDirect
Pacific-Basin Finance Journal

journal homepage: www.elsevier.com/locate/pacfin
Volatility spillovers of A- and B-shares for the Chinese stock

market and its impact on the Chinese index returns
Chien-Ping Chung a, Tzu-Hsiang Liao b, Hsiu-Chuan Lee b, *
a
Management Undergraduate Honors Program, National Taiwan University of Science and Technology, No.43, Keelung Rd., Sec.4, Da’an Dist.,
Taipei City 10607, Taiwan
b
Department of Finance, Ming Chuan University, 250 Zhong Shan N. Rd., Sec. 5, Taipei 111, Taiwan
A R T I C L E I N F O A B S T R A C T
Keywords: This paper investigates the net directional and total volatility spillovers of A- and B-shares in the
A-shares Chinese stock market. Using the framework proposed by Diebold and Yilmaz (2012, 2014), our
B-shares empirical results show a net exporter of volatility associated with uncertainty shocks from A-
Uncertainty shocks
shares to B-shares. Moreover, the uncertainty indices measured by the total volatility spillover
Net volatility spillovers
Total volatility spillover index
index and the global volatility index exert a nonlinear effect on subsequent Chinese stock index
Chinese stock index returns returns. Finally, our findings indicate that for explaining Chinese stock index returns, the total
volatility spillover index provides more useful information than the global volatility index.
1. Introduction
The purpose of the present study is to obtain insights into the volatility spillovers of the A- and B-shares of the Shanghai Stock
Exchange (SHSE) and the Shenzhen Stock Exchange (SZSE). More specifically, this paper first investigates net directional volatility
spillovers for the A- and B-shares of the SHSE and SZSE, and then examines how the total volatility spillovers are priced in the Chinese
stock market. As a young emerging stock market, the Chinese stock market has grown rapidly and has received considerable attention
since 1990. At the end of 2019, the total market capitalization of listed domestic companies in the Shanghai (SH) and Shenzhen (SZ)
stock markets reached 8.52 trillion USD. Thus, the Chinese stock market ranked third globally after the NYSE and NASDAQ.1
Furthermore, Chinese A-shares are included by Morgan Stanley Capital International in their global investable market indexes.2
Therefore, understanding the net directional and total volatility spillovers of the Chinese stock market is crucial, especially for the A-
and B-shares markets. Previous studies have examined the directional (e.g., unidirectional or bidirectional) volatility spillovers of the
A- and B-shares of the SHSE and SZSE using multivariate GARCH models (e.g., Qiao et al. 2008; Chen et al. 2011; Do et al., 2020).
However, the net directional and total volatility spillovers of the A-and B-shares markets have not been investigated. Therefore, the
present study attempts to fill this gap in the literature by using the generalized vector autoregressive (VAR) framework suggested by
Diebold and Yilmaz (2012, 2014) to study the net directional and total volatility spillovers of the A-and B-shares markets and the effect
of the magnitude of total volatility spillovers on the index returns for the A- and B-shares of the SHSE and SZSE.
The generalized VAR proposed by Diebold and Yilmaz (2012, 2014) measures the net directional and total volatility spillovers of
* Corresponding author.
E-mail addresses: thomas6311@mail.ntust.edu.tw (C.-P. Chung), thliao@mail.mcu.edu.tw (T.-H. Liao), hclee@mail.mcu.edu.tw (H.-C. Lee).
1
See https://data.worldbank.org/indicator/CM.MKT.LCAP.CD.
2
See https://www.globalxetfs.com/including-china-a-shares/.
https://doi.org/10.1016/j.pacfin.2020.101466
Received 7 August 2020; Received in revised form 19 October 2020; Accepted 9 November 2020
Available online 12 November 2020
0927-538X/© 2020 Elsevier B.V. All rights reserved.
C.-P. Chung et al. Pacific-Basin Finance Journal 65 (2021) 101466
the variables of interests by estimating the volatility spillovers in a multivariate system. Diebold and Yilmaz (2014) indicate that
multivariate GARCH models measure only pairwise association among variables of interests, and thus, it is difficult to capture the
relationship among the variables in the entire system. To overcome this limitation, Diebold and Yilmaz (2012, 2014) propose a
framework based on the generalized VAR to measure spillovers and dependencies from a pairwise relation to a system-wide associ
ation. Diebold and Yilmaz (2012, 2014) and Baruník and Křehlík (2018) have suggested that the system-wide volatility spillover
measures reveal the sources of uncertainty shocks and the magnitude of the market-wide uncertainty under a system-wide framework.3
Furthermore, prior studies have documented that the prices of financial assets are significantly affected by the uncertainty in financial
markets (e.g., Bansal and Yaron 2004; He and Krishnamurthy 2013; Adrian et al. 2019). Therefore, the framework suggested by
Diebold and Yilmaz (2012, 2014) allows us to explore the net directional volatility spillovers related to uncertainty shocks and
provides an opportunity to understand the pricing of uncertainty shocks associated with systemic risk in the Chinese stock market.
Using the data from January 2, 2001 to May 29, 2020, our empirical evidence reveals a net exporter of volatility related to un
certainty shocks from A-share markets to B-share markets. This finding indicates that for domestic and foreign investors, A-share
markets comprise a critical channel that reflects both global and local uncertainty shocks after a series of regulatory changes and
reforms. Furthermore, our results present that the uncertainty indices based on the total volatility spillover index and the global
volatility index have a nonlinear effect on subsequent stock index returns in the Chinese stock market. Specifically, the relationship
between uncertainty indices and subsequent index returns in the Chinese stock market displays a V-shaped curve. This finding is
consistent with the nonlinear risk–return trade-off hypothesis suggested by He and Krishnamurthy (2013) and Adrian et al. (2019).
Finally, our empirical evidence suggests that the uncertainty index measured by the volatility spillover index is more informative than
the global volatility index for explaining the index returns in the Chinese stock market. This finding indicates that while the global
volatility index is correlated with systemic risk in the global stock markets (Yang et al. 2020), the volatility spillover index of A- and B-
shares markets represents systemic risk related to uncertainty shocks from the global stock markets and the unique uncertainty shocks
from the Chinese stock market.
The contributions of this paper are three-fold. First, our evidence presents the net directional and total volatility spillovers between
the A- and B-shares of the SHSE and SZSE markets, which could provide early-warning signals for regulators and policymakers to
implement a stabilization policy in the Chinese stock market. Qiao et al. (2008), Chen et al. (2011), and Do et al., 2020 have reported
bidirectional volatility spillover effects between A-share and B-share markets by using multivariate GARCH models. Nevertheless, their
findings do not indicate the most influential markets for volatility spillovers and the magnitude of the total volatility spillover.4 The
framework proposed by Diebold and Yilmaz (2012, 2014) is used to assess the volatility spillovers from the entire system among the
variables of interests, and the results can provide the measures of net directional and total volatility spillovers for the variables. The
results document that A-share markets are net exporters of future volatility, and the uncertainty shocks for A-share markets contribute
to over 50% of the total volatility spillovers. Our findings suggest that the Chinese government should implement stabilization policies
based on the net directional and total volatility spillovers of A-share markets when uncertainty shocks affect the Chinese stock market.
Hence, our evidence, obtained based on the framework of Diebold and Yilmaz (2012, 2014), complements the literature by providing
the net directional and total volatility spillovers of A-shares and B-shares of the SHSE and SZSE and provides policy implications for
regulators and policymakers.
Second, this paper contributes to the literature on how the volatility spillovers related to uncertainty shocks in a systemic manner
are priced in the Chinese stock market. Whereas Bansal and Yaron (2004) report a negative relationship between uncertainties and
asset returns, He and Krishnamurthy (2013) further propose that risk–return trade-offs are nonlinear. Therefore, the present study
focuses on the nonlinear relationship between the market uncertainty measured by the total volatility index and the subsequent index
returns. To the best of our knowledge, this is the first study to investigate the nonlinear effect of the total volatility spillover index on
the process of price formation for the Chinese stock market. The empirical result will further deepen our understanding regarding the
nature of the relationship between market uncertainty and subsequent index returns. Third, this study investigates whether the un
certainty measured using the volatility spillover index is more informative on subsequent Chinese stock index returns than the un
certainty measured using the global volatility index. The findings indicate that the volatility spillover index of the Chinese stock
markets is a more favorable indicator than the global volatility index for measuring the magnitude of market uncertainty and clarifying
the nonlinear risk–return trade-off in the Chinese stock market. Practitioners can use the empirical evidence presented in this paper for
asset allocation and risk management.
The rest of the paper is organized as follows. Section 2 presents the institutional background, related literature, and hypotheses.
Section 3 describes the data and methodology. Section 4 presents the empirical results. Section 5 presents the conclusions of this study.
3
Diebold and Yilmaz (2014, 2016) and Baruník and Křehlík (2018) have indicated that the positive and negative net spillovers in volatility
estimated using the generalized VAR can be regarded as the net exporters and importers of future uncertainty, respectively, because volatility is a
measure of risk, which is associated with the probability of future uncertainty. Furthermore, Diebold and Yilmaz (2014) argue that the total
volatility spillover index based on the variance decomposition of the generalized VAR approach is related to uncertainty in systemic risk. In
accordance with Diebold and Yilmaz (2014), Baruník and Křehlík (2018) show that the total volatility spillover index, which is associated with the
systemic risk, increases with market uncertainty.
4
Several studies have examined the topic of volatility spillovers using the GARCH models and do not constitute an exhaustive list.
2
1.1. Institutional background, related literature, and hypotheses
A series of regulatory changes were introduced by the Chinese government in 2001. Before February 19, 2001, a perfectly
segmented policy was adopted by the Chinese government as a mechanism for developing and regulating the Chinese stock market.
The Chinese stock market comprises two major types of shares, namely A-shares and B-shares, that cater to the needs of different
investors. A-shares are generally traded by Chinese citizens living in mainland China, whereas B-shares are generally traded by foreign
investors. A-shares and B-shares are both listed on the SHSE and SZSE. However, on February 19, 2001, the Chinese government
implemented a new policy that allows domestic investors with foreign currency holdings to buy B-shares. In 2002, the Chinese
government implemented the Qualified Foreign Institutional Investor (QFII) program, which enables qualified foreign institutional
investors to hold A-shares. Meanwhile, B-shares issuance has died out since the introduction of the QFII. Regulatory reforms and
capital deregulation were further implemented by the Chinese government from 2012 to 2016.5 After a series of regulatory changes
and reforms, foreign investors were allowed to trade A-shares, and domestic Chinese investors were allowed to trade B-shares, albeit
with some restrictions. Despite the regulatory reforms and capital deregulation implemented by the Chinese government, A-shares are
still predominantly traded by domestic retail Chinese investors, and B-shares are still predominantly traded by foreign institutional
investors (Do et al., 2020). Because of the series of regulatory changes, studies have focused on volatility spillovers between A-share
and B-share markets by using bivariate GARCH models, and the evidence presents bidirectional volatility spillovers between A-share
and B-share markets (Qiao et al. 2008; Chen et al. 2011; Do et al., 2020). However, multivariate GARCH models provide little in
formation on the net directional volatility spillovers and total volatility spillovers related to systemic risk. The volatility spillover effect
estimated using the generalized VAR framework can provide measures of the sources of uncertainty shocks and the magnitude of the
market uncertainty associated with the market-wide risk.
Studies have employed the generalized VAR framework proposed by Diebold and Yilmaz (2012, 2014) to investigate the net
directional and total volatility and return spillovers among Chinese financial institutions. Wang et al. (2018) explore volatility
spillovers (or connectedness) in the Chinese banking system using the volatility spillover approach of Diebold and Yilmaz (2012,
2014), and they find that small banks contribute more volatility connectedness or shocks. The findings on volatility spillovers and
connectedness indicate that small banks are net exporters of future uncertainty. Wang et al. (2018) further demonstrate that the
dynamic volatility connectedness index is an early-warning indicator because the total dynamic volatility spillover index increases
sharply when the market is under distress. Yang et al. (2019) explore return spillovers for China’s financial institution network after
the global financial crisis and report that market-oriented large commercial banks generally play a more pronounced role in trans
mitting financial shocks than the four state-owned megabanks. These results are consistent with the findings of Wang et al. (2018).
Prior studies have explored volatility spillovers between A-shares and B-shares of the Chinese stock market (e.g., Qiao et al. 2008;
Chen et al. 2011; Do et al., 2020) using bivariate GARCH models. Furthermore, the net directional volatility (Wang et al. 2018) and
return (Yang et al. 2019) spillovers have been investigated using the framework proposed by Diebold and Yilmaz (2012, 2014) for
Chinese financial institutions. However, none of these studies have investigated the net directional and total volatility spillovers of A-
shares and B-shares and have examined the effect of uncertainty measured by the total volatility spillover index on subsequent stock
index returns in the Chinese stock market. The present study attempts to fill this gap.
This paper hypothesizes that the net exporter of volatility (termed future uncertainty hereafter) directionality is from A-shares to B-
shares for the following reasons. First, state-owned or government-owned enterprises are crucial components of the Chinese stock
market. State-owned or government-owned enterprises are firms in which the state or government has control through full, majority,
or significant minority ownership. Managers of these firms are often appointed by the Chinese government. Domestic retail Chinese
investors may trade stocks based on the actions of government-appointed managers because these managers possess information on
market developments and are responsible for the implementation of Chinese government interventions. Therefore, A-share markets
respond and adjust to local uncertainty shocks faster than B-shares because A-shares are predominantly traded by domestic retail
Chinese investors (Yao et al. 2014). Furthermore, regulatory changes and reforms result in a larger number of stocks listed on A-share
markets than on B-share markets, larger average market capitalization of A-shares than that of B-shares, and more liquid A-share
markets than B-share markets. Consequently, the A-shares in the Chinese market are gradually being included in major stock indices.
Therefore, an increasing number of international investors are turning their attention to increasingly important China A-share markets,
although A-shares are still primarily traded by domestic retail Chinese investors.6 As a result, A-share markets also incorporate the
uncertainty shocks from the global stock markets. Based on above discussions, the Chinese A-share markets are less restricted on
incorporating sources of local and global uncertainty shocks from the Chinese and the global stock markets, respectively. Hence,
Hypothesis 1 is presented as follows:
Hypothesis 1. A-shares are net exporters of future uncertainty to B-shares.
Prices of financial assets, such as stock index prices, are significantly affected by the uncertainty in financial markets. Bansal and
Yaron (2004) indicate that investors disfavor uncertainty. Therefore, increases in uncertainty cause large equity risk premia. A higher
equity risk premium causes lower present values because the discount of the expected cash flows is higher, which leads to a decrease in
asset prices. Therefore, a rise in economic and financial uncertainties will result in a marked fall in asset prices. However, prior
5
Deregulation policies implemented in the Chinese stock markets from 2012 to 2016 were the RMB QFII, Shanghai-Hong Kong Connect scheme
2014, and Shenzhen-Hong Kong Connect scheme 2016.
6
https://www.schroders.com/en/uk/private-investor/insights/markets/eight-charts-that-explain-the-growing-importance-of-china-a-shares/.
3
research has suggested that the risk–return trade-offs are nonlinear (He and Krishnamurthy 2013; Adrian et al. 2019). He and
Krishnamurthy (2013) demonstrate the nonlinearity of risk premia during crises and suggest three government policies (i.e., reducing
intermediaries borrowing costs, injecting equity capital, and purchasing distressed assets) to stabilize financial markets during
financial crises. He and Krishnamurthy (2013) further indicate that injecting equity capital is particularly effective because it mitigates
the equity capital constraint that drives financial crises. Adrian et al. (2019) indicate that the extremely high values of uncertainty (e.
g., the VIX index) reflect the fact that severe financial crises are followed by aggressive interest rate cuts caused by the collapse of real
economic activity. Monetary stimulus engenders lower equity risk premia, which in turn causes changes in cash flow expectations (e.g.,
an increase in the present values of assets leads to an increase in asset prices). Therefore, the effect of uncertainty on subsequent stock
returns is negative when the uncertainty is below the threshold. However, the effect on subsequent stock returns becomes positive
when the uncertainty reaches a relatively high level because of the economic stimulus. Therefore, Hypothesis 2 is proposed as follows:
Hypothesis 2. The effect of uncertainty on subsequent stock index returns results in a V-shaped relationship.
The total volatility spillover index is a better indicator in measured uncertainty shocks in the Chinese stock market than the global
volatility index. The intuition is straightforward to understand. The uncertainty measured by the global volatility index represents
shocks from the global stock markets. Therefore, the global volatility index is correlated with systemic risk in the global stock markets
(Yang et al. 2020). Consequently, the global volatility index provides less information on uncertainty shocks in the Chinese stock
market. However, the uncertainty measured by the total volatility index of the Chinese stock market is estimated by aggregation of
uncertainty shocks from A-share and B-share markets. Therefore, the uncertainty measured by the total volatility index of the Chinese
stock market reflects uncertainty shocks from the global stock markets and incorporates the uncertainty shocks (e.g., public and private
information) from the Chinese stock market. As such, Hypothesis 3 is presented as follows:
Hypothesis 3. The uncertainty measured using the volatility spillover index of the Chinese stock market is more informative on
subsequent Chinese stock index returns than the uncertainty measured by the global VIX indices.
2. Data and methodology
2.1. Data
The data comprise daily stock indices of the opening, high, low, and closing prices for the A-shares and B-shares of the SHSE and the
SZSE. Based on the methodology of Diebold and Yilmaz (2016), daily range-based volatility is constructed using the GK (Garman and
Klass 1980) approach, as follows:
( )2 [( )( ) ( )( )] ( )2
σ2i,d = 0.511 hi,d − li,d − 0.019 ci,d − oi,d hi,d + li,d − 2oi,d − 2 hi,d − oi,d li,d − oi,d − 0.383 ci,d − oi,d (1)
where oi,d, hi,d, li,d, and ci,d are the logarithm of daily opening, high, low, and closing prices for index i on day t, respectively. i denotes
SHA, SHB, SZA, and SZB. SHA and SHB are the indices of the A-shares and B-shares of the SHSE, respectively. SZA and SZB are the
indices of the A-shares and B-shares of the SZSE, respectively. Because σ2i,d is an estimator of daily variance, the corresponding estimate
of the annualized daily percent standard deviation (volatility) is computed as follows:
√̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅
σi,d = 100 × 365 × σ2i,d (2)
Six stock markets’ implied volatility indices are used to measure the global uncertainty, including US VIX (the Chicago Board
Option Exchange’s S&P500 volatility index), VCAC (Euronext-Paris’ CAC-40 volatility index), VDAX (Deutsche Borse’s DAX-30
volatility index), VXJ (Nikkei 225 volatility index), VAEX (Euronext Amsterdam Exchange’s volatility index), and VSMI (SWX
Swiss Exchange’s SMI volatility index). The 2-day rolling average of daily implied volatility (Forbes and Rigobon 2002; Yang et al.
2020) is used to calculate the cross-sectional average implied volatility GVX. All data are obtained from the Datastream. The sample
period is from January 2, 2001 to May 29, 2020.
2.2. Measurement of net directional and total volatility spillovers
The generalized VAR framework proposed by Diebold and Yilmaz (2012, 2014) is employed to estimate the net directional and
4
total volatility spillovers. Following Yang et al. (2020), the logarithm difference in annualized daily volatility is used to estimate
volatility spillovers to capture the volatility spillovers that are less correlated with inherent risks (e.g., credit and liquidity risk) and are
more sensitive to uncertainty shocks.7 The VAR model is estimated on the vector of the logarithm difference in annualized daily
volatility as follows:
p
∑
Yt = ϕι Yt− ι + εt , t = 1, 2, …, T, (3)
ι=1
where Yt = (∆ln(σ SHA, d), ∆ln(σ SHB, d), ∆ln(σSZA, d), ∆ln(σSZB, d)) is a N × 1 (N = 4) vector of jointly determined dependent variables. ϕι (ι
= 1, 2, …, p) are N × N coefficient matrices, p is the lag order of the generalized VAR, and εt ~ (0, Ω) is an N × 1 independent and
identically distributed disturbance vectors.
Given that Yt is covariance-stationary, Eq. (3) can be rewritten as an infinite vector moving average process:
∑
∞
Yt = Aι εt− ι , (4)
ι=0
where Aι is N × N coefficient matrices and satisfies the following recursive relations:

Aι = ϕ1 Aι− 1 + ϕ2 Aι− 2 + … + ϕp Aι− p (5)
where A0 = IN and Aι = 0 for ι < 0. Diebold and Yilmaz (2012, 2014) employ the generalized forecast error variance decompositions
(GFEVD) suggested by Koop et al. (1996) and Pesaran and Shin (1998) to calculate directional and total volatility spillovers. In contrast
to the variance decomposition that uses Cholesky factorization is sensitive to variable ordering, GFEVD is invariant to the ordering of
the variables. Eq. (5) suggests that the element H-step-ahead GFEVD can be estimated as follows:
∑1 (
H−
′ )2
σ−jj 1 ei Aι Ωej
θgi,j (H) =
ι=0
(6)
∑1(
H− )
ei Aι ΩA,ι ej
′
ι=0
g
where θi,j (H) is defined as the fraction of the H-step-ahead error variances in forecasting variable i due to shocks in variable j. Ω is the N
× N covariance matrix for the error term vector ε. σ jj is the j-th diagonal element of Ω. ei is the selection vector with unity as its ith
∑N
g
element and zeros elsewhere. Because each row of variance decomposition does not necessarily sum to one (e.g., = 1, each
θi,j (H) ∕
j=1
row is normalized by the row sum as follows:
θgi,j (H)
(7)
g
θ̃i,j (H) = ∑N g
j=1 θi,j (H)
∑N g ∑N g
We thus obtain j=1 θ̃i,j (H) = 1 and i,j=1 θ̃i,j (H) = N, and the total volatility spillover is calculated as follows:
∑
N g ∑
N g
θ̃i,j (H) θ̃i,j (H)
i,j=1 i,j=1
i∕
=j i∕
=j
SP = = (8)
∑
N g N
θ̃i,j (H)
i,j=1
The to-spillovers of index i are defined as total directional connectedness from index i to all other indices j as follows:
7
Wang et al. (2018) document that state-owned commercial banks contribute less to volatility connectedness than joint-stock and city commercial
banks, suggesting that a bank may be “too big to fall” but not necessarily “too interconnected to fail” in the Chinese banking system. As presented by
Wang et al. (2018), the level of volatility for state-owned commercial banks is lower than the level for joint-stock and city commercial banks because
of the lower credit and operating risks among state-owned commercial banks. Wang et al. (2018) use the level of volatility to explore volatility
spillovers and find that a reduced contribution of volatility spillovers in state-owned commercial banks is associated with low credit and operational
risks. In other words, the volatility spillovers estimated by the level of volatility are less correlated with uncertainty shocks. However, the logarithm
difference in annualized daily volatility is less correlated with the nature of the inherent risks (e.g., credit and operational risks embedded in stocks)
but is more associated with uncertainty shocks. This study uses the logarithm difference in annualized daily volatility to estimate volatility spillovers
to capture the volatility spillovers, which are more sensitive to uncertainty shocks, as suggested by Yang et al. (2020).
5
Table 1
Summary statistics for the mean values and unit-root test.
SHA SHB SZA SZB
Panel A: Mean value

Level (%) 19.5621 20.1957 20.8904 19.1384
Difference (‰) 0.0890 − 0.0800 0.1830 − 0.0350
Panel B: ADF-test
Level − 7.0846*** − 8.8868*** − 7.5662*** − 9.8190***
Difference − 25.2456*** − 23.9384*** − 25.3119*** − 24.5638***
This table presents summary statistics of the mean values and unit-root test of the level and logarithm difference in annualized daily volatility
regarding the indices of the A-shares and B-shares of the Shanghai Stock Exchange (SHSE) and the Shenzhen Stock Exchange (SZSE). SHA and SHB are
the indices of the A-shares and B-shares of the SHSE, respectively. SZA and SZB are the indices of the A-shares and B-shares of the SZSE, respectively.
Panel A provides the mean values for the level and logarithm difference in annualized daily volatility. Panel B displays the results of the unit-root tests
for the level and logarithm difference in annualized daily volatility. Following Diebold and Yilmaz (2016), daily range-based volatility is computed
using the GK (Garman and Klass 1980) approach as follows:
σ2i,d = 0.511(hi,d − li,d)2 − 0.019[(ci,d − oi,d)(hi,d + li,d − 2oi,d) − 2(hi,d − oi,d)(li,d − oi,d)] − 0.383(ci,d − oi,d)
.
where oi,d, hi,d, li,d, and ci,d are the logarithm of daily opening, high, low, and closing prices for index i on day t, respectively. i represents SHA, SHB,
SZA, or SZB. Because σ2i,d is an estimator of the daily variance, the corresponding estimate of the annualized daily percent standard deviation
(volatility) is computed as follows:
√̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅
σi,d = 100 × 365 × σ2i,d
The sample period is from January 2, 2001 to May 29, 2020.
*** indicates significance at the 0.01 level.
∑
N g ∑
N g
θ̃j,i (H) θ̃j,i (H)
j=1 j=1
i∕
=j i∕
=j
To∙←i = = (9)
∑
N g N
θ̃i,j (H)
i,j=1
The from-spillovers of index i are calculated as total directional connectedness to index i from all other indices j as follows:
∑
N g ∑
N g
θ̃i,j (H) θ̃i,j (H)
j=1 j=1
i∕
=j i∕
=j
Fromi←∙ = = (10)
∑
N g N
θ̃i,j (H)
i,j=1
Finally, net-spillovers are calculated as follows:

Neti = To∙←i − Fromi←∙ (11)
The generalized VAR model with a 300-day rolling sample is used to estimate dynamic spillovers. The number of optimal lags is
determined using the Schwarz Information Criterion, and the generalized variance decompositions of 10-day-ahead forecast errors are
employed for the analysis. With these moving window estimations, the dynamic total volatility connectedness index SPd is used as a
proxy for the uncertainty from the Chinese stock market, defined as UCTYCNSP,d = SPd.
2.3. Regression kink model
The regression kink model suggested by Hansen (2017) is employed to investigate the nonlinear effect of uncertainty on subsequent
stock index returns. Rather than daily data, weekly data are used for regression analyses to reduce statistical concerns regarding
overlapping observations, without losing useful information or limiting the sample size.8 The regression kink model is estimated as
follows:
( ) ( )
Ri,W,W+n = βi,j,n,1 UCTY j,W − γi,j,n − + βi,j,n,2 UCTY j,W − γ i,j,n + + θi,j,n Ri,W− n,W + αi,j,n + εi,W,W+n (12)
where Ri,W,W+n is the weekly index returns for index i from W to W+n. i is SHA, SHB, SZA, or SZB. SHA and SHB are the indices of the A-
shares and B-shares of the SHSE, respectively. SZA and SZB are the indices of the A-shares and B-shares of the SZSE, respectively.
8
This paper also uses the daily data to investigate the effect of uncertainty on subsequent stock index returns in the Chinese stock market. The
empirical findings remain unchanged and are available from the authors upon request.
6
Table 2
Correlations for the difference in annualized daily volatility.
∆ln(σSHA) ∆ln(σSHB) ∆ln(σSZA) ∆ln(σSZB)
∆ln(σSHA) 1.0000 0.6125 0.8363 0.5504

∆ln(σSHB) 0.6125 1.0000 0.6117 0.6115
∆ln(σSZA) 0.8363 0.6117 1.0000 0.5556
∆ln(σSZB) 0.5504 0.6115 0.5556 1.0000
This table presents the correlations in the differences in annualized daily volatility of the A-share and B-share indices of the Shanghai Stock Exchange
(SHSE) and the Shenzhen Stock Exchange (SZSE). SHA and SHB are the indices of the A-shares and B-shares of the SHSE, respectively. SZA and SZB are
the indices of the A-shares and B-shares of the SZSE, respectively. Panel A displays the correlations of the difference in annualized daily volatility.
Panel B provides the ADF test of differences in annualized daily volatility. Following Diebold and Yilmaz (2016), daily range-based volatility is
computed using the GK (Garman and Klass 1980) approach as follows:
Placeholder Text
SZA, or SZB. Because σ 2i,d is an estimator of daily variance, the corresponding estimate of the annualized daily percent standard deviation (volatility) is
computed as follows:
√̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅
σi,d = 100 × 365 × σ2i,d
The sample period is from January 2, 2001 to May 29, 2020.
UCTYj,W is the proxy for uncertainty, j = CNSP or GVX. γ i,j,n is the cut-off level of UCTYj,W. The slope of UCTYj,W equals βi,j,n,1 when
UCTYj,W < γi,j,n and equals βi,j,n,2 when UCTYj,W > γ i,j,n, yet the regression function is continuous in all variables. A lagged-dependent
variable is included as a regressor to ensure that the errors εi,W,W+n are approximately serially uncorrelated. εi,W,W+n is the residual for
index i from W to W+n. UCTYCNSP,W is a weekly uncertainty index that is measured by the volatility spillover index of the Chinese stock
market. UCTYGVX,W is the weekly uncertainty index of the global stock markets that is measured using the global implied volatility
index (GVX). UCTYGVX,W is the cross-sectional average of the weekly implied volatility indices of six developed stock markets. The
weekly index returns are calculated using weekly prices on Wednesday (Wednesday close to Wednesday close) following Griffin et al.
(2007) and Chuang et al. (2014). The weekly uncertainty indices for UCTYCNSP,W and UCTYGVX,W are calculated based on the average
of the daily uncertainty indices for UCTYCNSP,d and UCTYGVX,d from Wednesday to Wednesday, respectively. Following Hansen (2017),
the bootstrap method is employed to compute the F-stat and its p-value and obtain the confidence intervals for parameters because the
limiting distribution is non-standard. The F-stat is used to explore the threshold effect. The lower and upper bounds are 95% confidence
intervals, which are used to examine the significance of regression coefficients.
3. Empirical results
3.1. Descriptive statistics
3.1.1. Descriptive statistics for volatility

Table 1 presents the summary statistics for the mean values and unit-root tests of the level and logarithm differences in annualized
daily volatility regarding the indices for the A-shares and B-shares of the SHSE and the SZSE. Panel A of Table 1 displays the mean
values for the level and logarithm difference in annualized daily volatility. The results show that the levels in volatility are approx
imately 20.0000 for SHA, SHB, SZA, and SZB.9 However, the mean values of the logarithm difference in annualized daily volatility
differ. The mean values of the logarithm difference in annualized daily volatility for SHA, SHB, SZA, and SZB are 0.0890, − 0.0800,
0.1830, and − 0.0350, respectively. The findings indicate that the values for the logarithm difference in annualized daily volatility for
A-shares are positive, whereas the values are negative for B-shares. These results indicate that A-share markets are, on average, more
correlated and more sensitive to uncertainty shocks than B-share markets, which may be because A-share markets have attracted
attention from both domestic retail Chinese investors and international investors as a result of a series of regulatory changes and
reforms.
The covariance-stationary process of variables must be identified to perform the GFEVD, as suggested by Diebold and Yilmaz (2012,
2014). Hence, unit-root tests are performed, and the results are presented in Panel B of Table 1. Panel B in Table 1 displays the results of
the unit-root tests for the levels and logarithm differences in annualized daily volatility. The values of the ADF tests for the level in
annualized daily volatility are − 7.0846, − 8.8868, − 7.5662, and − 9.8190 for SHA, SHB, SZA, and SZB, respectively. The values of the
ADF tests on the difference in annualized daily volatility are − 25.2456, − 23.9384, − 25.3119, and − 24.5638 for SHA, SHB, SZA, and
SZB, respectively. The results presented in Panel B of Table 1 suggest that the levels and logarithm differences in annualized daily
volatility for SHA, SHB, SZA, and SZB are all stationary and can be used to estimate the directional and total volatility spillovers. In
order to capture the volatility spillovers which is more sensitive to uncertainty shocks, this paper uses the logarithm difference in
annualized daily volatility to estimate volatility spillovers as in Yang et al. (2020).
9
The mean values of the volatility level of SHA, SHB, SZA, and SZB are 19.5621, 20.1957, 20.8904, and 19.1384, respectively.
7
Table 3
Descriptive statistics for volatility spillovers with rolling approach.
∆ln(σSHA) ∆ln(σSHB) ∆ln(σSZA) ∆ln(σSZB)
Panel A: Directional spillovers, To∙←i

Mean 0.1593 0.1327 0.1613 0.1103
Median 0.1643 0.1335 0.1634 0.1134
Std 0.0170 0.0167 0.0140 0.0225
Minimum 0.1019 0.0893 0.1126 0.0558
Maximum 0.1878 0.1745 0.1929 0.1479
Panel B: Directional spillovers, Fromi←∙
Mean 0.1454 0.1402 0.1471 0.1310
Median 0.1474 0.1385 0.1484 0.1330
Std 0.0111 0.0148 0.0101 0.0188
Minimum 0.1093 0.1015 0.1205 0.0794
Maximum 0.1653 0.1683 0.1649 0.1608
Panel C: Directional spillovers, Neti
Mean 0.0139*** − 0.0075*** 0.0142*** − 0.0207***
Median 0.0149 − 0.0102 0.0141 − 0.0201
Std 0.0099 0.0135 0.0085 0.0092
Minimum − 0.0166 − 0.0352 − 0.0110 − 0.0469
Maximum 0.0357 0.0313 0.0371 0.0019
This table presents the descriptive statistics of the dynamic (rolling) directional spillovers. Panels A to C display the spillovers for “To,” “From,” and
“Net” for the logarithm difference in annualized daily volatility between the indices of the A-shares and B-shares of the Shanghai Stock Exchange
the indices of the A-shares and B-shares of the SZSE, respectively. Following Diebold and Yilmaz (2016), daily range-based volatility is computed
√̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅
σi,d = 100 × 365 × σ2i,d
The generalized vector autoregressive (VAR) framework proposed by Diebold and Yilmaz (2012, 2014) is used to estimate the rolling spillovers. The
generalized VAR model is estimated on the vector of the logarithm difference in annualized daily volatility following Yang et al. (2020). The
generalized VAR model with a 300-day rolling sample is used to estimate the dynamic spillovers. The number of optimal lags is determined using the
Schwarz Information Criterion (SIC), and the generalized variance decompositions of 10-day-ahead forecast errors are employed for our analysis. A
total of 4765 directional spillovers are thus obtained from February 25, 2002 to May 29, 2020.
Table 2 displays the correlation matrix of the differences in annualized daily volatility for SHA, SHB, SZA, and SZB. The results
shows that the correlations between SHA, SHB, SZA, and SZB range from 0.5504 to 0.8363, indicating that the correlations of the
differences in annualized daily volatility among SHA, SHB, SZA, and SZB are moderately high. The A-shares between SHA and SZA are
most closely correlated, with a value of 0.8363. The correlation between SHA and SZB is the lowest, with a value of 0.5504. The
empirical evidence for correlations suggests that A-share markets reflect similar types of uncertainty shocks, whereas the A-share and
B-share markets are associated with different types of uncertainty shocks.
3.1.2. Descriptive statistics for directional and total volatility spillovers

Table 3 presents the descriptive statistics for the dynamic (rolling) directional spillovers. Panels A to C display the spillovers for
“To,” “From,” and “Net” for the logarithm differences in annualized daily volatility of the indices of the A-shares and B-shares of the
SHSE and SZSE. Panel A of Table 3 shows that the mean values for the directional spillovers of “To∙←i” are 0.1593, 0.1327, 0.1613, and
0.1103 for SHA, SHB, SZA, and SZB, respectively. The mean values of directional spillovers “To∙←i” are higher for A-share markets than
for B-share markets, indicating that A-share markets (SHA and SZA) transmit more uncertainty shocks to other indices than B-share
markets (SHB and SZB). Panel B of Table 3 illustrates that the mean values for the directional spillovers “From∙←i” are 0.1454, 0.1402,
0.1471, and 0.1310 for SHA, SHB, SZA, and SZB, respectively, indicating that A-share markets (SHA and SZA) receive more uncertainty
shocks from other indices than B-share markets (SHB and SZB). Panels A and B in Table 3 show that A-share markets display lower
within-market volatility spillover effects and higher cross-market volatility spillovers than B-share markets, indicating that A-share
markets are more closely correlated with uncertainty shocks than B-share markets. In summary, the evidence presented in Panels A and
B of Table 3 is consistent with the finding suggested by Qiao et al. (2008), Chen et al. (2011), and Do et al., 2020 in that the bidi
rectional volatility spillovers are observed for the A- and B-shares of the SHSE and SZSE. However, the findings presented in Panels A
and B of Table 3 do not reveal the net exporter of future uncertainty for A-share and B-share markets. Therefore, the net exporter of
volatility related to future uncertainty is calculated using Eq. (11), and the results are displayed in Panel C of Table 3.
Panel C of Table 3 displays the descriptive statistics for the net volatility spillovers “Neti” of SHA, SHB, SZA, and SZB. The mean
(median) values of the net volatility spillovers of SHA, SHB, SZA, and SZB are 0.0139 (0.0149), − 0.0075 (− 0.0102), 0.0142 (0.0141),
8
Fig. 1. Net spillovers for the logarithm difference in annualized daily volatility with regards to the indices of the A- and B-shares of the Shanghai
Stock Exchange (SHSE) and the Shenzhen Stock Exchange (SZSE). SHA and SHB are net spillovers for the logarithm difference in annualized daily
volatility with regards to the indices of the A- and B-shares for the SHSE, respectively. SZA and SZB are net spillovers for the logarithm difference in
annualized daily volatility with regards to the index of the A- and B-shares for the SZSE, respectively.
and − 0.0207 (− 0.0201), respectively. The t-test statistics comparing the mean values are all significant at the conventional level,
indicating that A-share markets are the net exporters of volatility related to future uncertainty. Fig. 1 displays net-spillovers for the
logarithm difference in annualized daily volatility in the indices in A-shares and B-shares of the SHSE and the SZSE. Fig. 1 illustrates
that the net volatility spillovers of A-share markets are mostly positive, indicating that A-share markets (SHA and SZA) are the net
exporters of volatility, especially for SZA. The evidence presented in Panel C of Table 3 and Fig. 1 supports Hypothesis 1, which states
that A-shares are the net exporters of future uncertainty to B-shares. This finding is attributed to A-share markets being predominantly
traded by domestic retail Chinese investors and the fact that A-share markets have received increasing attention from international
investors as a result of a series of regulatory changes, reforms, and the inclusion in many major stock indices. The evidence for net
volatility spillovers complements previous works (Qiao et al. 2008; Chen et al. 2011; Do et al., 2020) by providing the sources of
uncertainty shocks.
Table 4 displays the descriptive statistics for the uncertainty indices in the Chinese stock market (UCTYCNSP,d) and global stock
markets (UCTYGVX,d). The results show that the mean values of UCTYCNSP,d and UCTYGVX,d are 0.5636 and 0.2143, respectively. The
values of the standard deviation for UCTYCNSP,d and UCTYGVX,d are 0.0522 and 0.0912, respectively, indicating that UCTYGVX,d is more
volatile than UCTYCNSP,d. These findings are confirmed by the minimum and maximum values of UCTYCNSP,d and UCTYGVX,d.
UCTYCNSP,d values range from 0.4280 to 0.6519, whereas UCTYGVX,d values range from 0.1070 to 0.7663. Furthermore, the correlation
between UCTYCNSP,d and UCTYGVX,d is moderately high, with the value at 0.4086. The summary statistics and the correlation findings
indicate that the uncertainty indices for UCTYCNSP,d and UCTYGVX,d do not include the same uncertainty shocks.
Fig. 2 displays the uncertainty index for UCTYCNSP,d from February 25, 2002 to May 29, 2020. Fig. 2 shows that UCTYCNSP,d reaches
a local peak during the corrections of the Internet bubble, Severe Acute Respiratory Syndrome (SARS), subprime crisis, sovereign debt
crisis, Chinese banking liquidity crisis, Chinese stock market turbulence, China–US trade war, and COVID-19 pandemic periods. Fig. 2
displays evidence that the uncertainty index for UCTYCNSP,d reflects both local shocks from the Chinese stock market and systemic risk
from the global financial markets. Accordingly, the uncertainty index for UCTYCNSP,d is a suitable measure of the local and global
uncertainty shocks on the Chinese stock market and could be useful in explaining the relationship between uncertainty shocks and
subsequent stock returns.
9
Table 4
Descriptive statistics for the uncertainty.
UCTYCNSP,d UCTYGVX,d
Mean 0.5636 0.2143

Median 0.5663 0.1891
Std 0.0522 0.0912
Minimum 0.4280 0.1070
Maximum 0.6519 0.7663
Correlation 0.4086
This table displays the descriptive statistics for the uncertainty indices in the Chinese
stock market (UCTYCNSP,d) and global stock markets (UCTYGVX,d). UCTYCNSP,d is the
uncertainty index measured by the volatility spillover index of the Chinese stock market.
The volatility spillover index of the Chinese stock market is estimated by calculating the
logarithm difference in annualized daily volatility (see Yang et al. 2020) between the
indices of the A-shares and B-shares of the Shanghai Stock Exchange (SHSE) and the
Shenzhen Stock Exchange (SZSE). Following Diebold and Yilmaz (2016), daily range-
based volatility is computed using the GK (Garman and Klass 1980) approach as follows:
σ2i,d = 0.511(hi,d − li,d)2 − 0.019[(ci,d − oi,d)(hi,d + li,d − 2oi,d) − 2(hi,d − oi,d)(li,d − oi,d)] −
0.383(ci,d − oi,d)2
where oi,d, hi,d, li,d, and ci,d are the logarithm of daily opening, high, low, and closing
prices for index i on day t, respectively. i represents SHA, SHB, SZA, or SZB. Because σ2i,d
is an estimator of daily variance, the corresponding estimate of the annualized daily
percent standard deviation (volatility) is computed as follows:
√̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅
σi,d = 100 × 365 × σ2i,d
The generalized vector autoregressive (VAR) framework proposed by Diebold and Yil
maz (2012, 2014) is used to estimate the volatility spillover index. The generalized VAR
model is estimated on the vector of the logarithm difference in annualized daily vola
tility following Yang et al. (2020). The generalized VAR model with a 300-day rolling
sample is used to estimate the dynamic spillovers. The number of optimal lags is
determined using the Schwarz Information Criterion (SIC), and the generalized variance
decompositions of 10-day-ahead forecast errors are employed for our analysis. A total of
4765 directional spillovers are thus obtained from February 25, 2002 to May 29, 2020.
UCTYGVX,d is the uncertainty index of global stock markets and is measured using the
global implied volatility index (GVX). UCTYGVX,d represents the average across six
developed stock markets’ implied volatility indices: US VIX (the Chicago Board Option
Exchange’s S&P500 volatility index), VCAC (Euronext-Paris’ CAC-40 volatility index),
VDAX (Deutsche Borse’s DAX-30 volatility index), VXJ (Nikkei 225 volatility index),
VAEX (Euronext Amsterdam Exchange’s volatility index), and VSMI (SWX Swiss Ex
change’s SMI volatility index). The 2-day rolling averaged daily implied volatility (see
Forbes and Rigobon 2002; Yang et al. 2020) is used to calculate the cross-sectional
average implied volatility GVX.
3.2. Effect of uncertainty on subsequent index returns
3.2.1. Linear regression

Table 5 summarizes the effect of uncertainty indices on subsequent weekly index returns in the Chinese stock market. Subsequent
weekly index returns represent the index stock returns of SHA, SHB, SZA, and SZB for the forecasting horizons of n=1, 12, 26, and 52
weeks. Panels A to D in Table 5 display the regression results for SHA, SHB, SZA, and SZB. The results presented in Panels A to D in
Table 5 are similar. Therefore, the interpretations focus on Panel A of Table 5.
The results of Panel A of Table 5 show that based on the regression coefficient significance of the uncertainty index and the value of
adjR2, the uncertainty index measured by the total volatility spillover index of the Chinese stock market (UCTYCNSP,W) has a larger
effect on subsequent SHA index returns than the uncertainty index measured using GVX (UCTYGVX, W). As illustrated in Panel A of
Table 5, the uncertainty index for UCTYCNSP,W has a significantly negative effect on subsequent index stock returns of SHA for fore
casting horizons at n = 1, 12, 26, and 52 weeks. The regression coefficients for UCTYCNSP,W are − 0.0486, − 0.4138, − 1.1033, and −
3.0671 for the forecasting horizons at 1, 12, 26, and 52 weeks, respectively. However, the regression coefficient for the uncertainty
index of UCTYGVX,W is only significant at the conventional level, with a value of − 0.8913 for the 52-week horizon. The adjR2 values of
UCTYCNSP,W are 0.0049, 0.0902, 0.0838, and 0.2367 for the forecasting horizons at n = 1, 12, 26, and 52 weeks. The values of adjR2 for
UCTYGVX,W are 0.0011, 0.0701, 0.0351, and 0.1143 for the forecasting horizons at weeks 1, 12, 26, and 52, respectively. These findings
suggest that UCTYCNSP,W is a better proxy of market uncertainty in explaining subsequent SHA index returns than UCTYCNSP,W in the
linear regression model.
Furthermore, Panel A of Table 5 illustrates that the values of adjR2 increase with forecasting horizons for a given uncertainty index
measured using UCTYGVX,W or UCTYGVX,W, indicating that the uncertainty index plays a more important role for long forecasting
10
C.-P. Chung et al.
11

Fig. 2. Total volatility spillovers among the indices of the A- and B-shares of the Shanghai Stock Exchange (SHSE) and the Shenzhen Stock Exchange (SZSE).
Table 5
Linear impact of uncertainty on subsequent weekly index returns in the Chinese stock market.
n=1 n = 12 n = 26 n = 52
j = CNSP j = GVX j = CNSP j = GVX j = CNSP j = GVX j = CNSP j = GVX
Panel A: Ri,W,W+n, i = SHA

αi,j,n 0.0285** 0.0039 0.2420*** − 0.0006 0.6428*** − 0.0090 1.7949*** 0.2432***
βi,j,n − 0.0486** − 0.0140 − 0.4138*** 0.0315 − 1.1033*** 0.1042 − 3.0671*** − 0.8913***
θi,j,n 0.0410 0.0435 0.2327*** 0.2727*** 0.1258*** 0.2022*** − 0.4018*** − 0.3553***
2
adjR 0.0049 0.0011 0.0902 0.0701 0.0838 0.0351 0.2367 0.1143
Panel B: Ri,W,W+n, i = SHB
αi,j,n 0.0231 0.0026 0.2589*** − 0.0061 0.6730*** − 0.0314 1.6914*** 0.1790***
βi,j,n − 0.0391 − 0.0077 − 0.4386*** 0.0698 − 1.1494*** 0.2255** − 2.8698*** − 0.5543***
θi,j,n 0.0906*** 0.0920*** 0.1199*** 0.1488*** 0.1044*** 0.1680*** − 0.3024*** − 0.2777***
2
adjR 0.0085 0.0066 0.0334 0.0186 0.0617 0.0233 0.1739 0.0678
Panel C: Ri,W,W+n, i = SZA
αi,j,n 0.0345** 0.0029 0.3460*** 0.0080 0.8493*** − 0.0043 2.0662*** 0.2036***
βi,j,n − 0.0577** − 0.0059 − 0.5806*** 0.0323 − 1.4354*** 0.1544 − 3.4640*** − 0.5193***
θi,j,n 0.0272 0.0323 0.1416*** 0.1843*** 0.1086*** 0.1908 − 0.2948*** − 0.2195***
adjR2 0.0038 − 0.0011 0.0622 0.0309 0.1010 0.0314 0.2072 0.0431
Panel D: Ri,W,W+n, i = SZB
αi,j,n 0.0121 0.0033 0.0963* − 0.0182 0.2970*** − 0.0654*** 0.7835*** 0.1175***
βi,j,n − 0.0181 − 0.0066 − 0.1363 0.1667*** − 0.4434*** 0.4880*** − 1.1576*** 0.0216
θi,j,n 0.0656* 0.0650* 0.1597*** 0.1905*** 0.0410 0.1197*** − 0.3738*** − 0.3409***
adjR2 0.0027 0.0023 0.0271 0.0335 0.0091 0.0272 0.1466 0.1201
This table displays the effect of uncertainty on subsequent weekly index returns in the Chinese stock market. Weekly data are used instead of daily
data for our regression analyses to reduce statistical concerns caused by overlapping observations, without losing useful information and sample size.
The linear regression model is estimated as follows:
Ri,W,W+n = αi,j,n + βi,j,n UCTYj,W + θi,j,n Ri,W− n,W + εi,W,W+n is the weekly index returns for index i from W to W+n. i is SHA, SHB, SZA, or SZB. SHA and
SHB are the indices of the A-shares and B-shares of the Shanghai Stock Exchange (SHSE). SZA and SZB are the indices of the A-shares and B-shares of
the Shenzhen Stock Exchange (SZSE). UCTYj,W is the proxy for uncertainty, with j = CNSP or GVX. A lagged-dependent variable is added as a regressor
to ensure that the errors εi,W,W+n are approximately serially uncorrelated. εi,W,W+n is the residual for index i from W to W+n. UCTYCNSP,W is a weekly
uncertainty index measured using the volatility spillover index of the Chinese stock market. UCTYGVX,W is the weekly uncertainty index of global stock
markets measured using the global implied volatility index (GVX). UCTYGVX,W is the average of six developed stock markets’ weekly implied volatility
indices. The weekly index returns are calculated based on the weekly prices on Wednesday (Wednesday close to Wednesday close) following Griffin
et al. (2007) and Chuang et al. (2014). The weekly uncertainty indices for UCTYCNSP,W and UCTYGVX,W are calculated by the average of the daily
uncertainty indices for UCTYCNSP,d and UCTYGVX,d from Wednesday to Wednesday, respectively. UCTYCNSP,d is estimated with a 300-day rolling
sample. Panels A to D display the regression results for SHA, SHB, SZA, and SZB. The Newey–West autocorrelation and heteroskedasticity-consistent
standard errors are used in the paper.
*,**, and *** indicate significance at the 0.1, 0.05, and 0.01 levels, respectively.
horizons than for short forecasting horizons. These findings displayed in Panel A of Table 5 can also be observed in Panels B to D of
Table 5. Finally, when we compare the adjR2 values from Panels A to D of Table 5, and the results further display that UCTYCNSP,W has
higher explanatory power in A-share markets than in B-share markets. For instance, the values of adjR2 are 0.2367 and 0.2072 for SHA
and SZA, and the values are 0.1739 and 0.1466 for SHB and SZB for the 52-week forecasting horizon, respectively. These findings
suggest that A-share markets are more closely correlated with UCTYCNSP,W than B-share markets.
In conclusion, Table 5 displays that the uncertainty index of UCTYCNSP,W negatively affects subsequent stock index returns in
Chinese stock markets and this finding is consistent with the prediction by Bansal and Yaron (2004) in that an increase in uncertainty
leads to a higher equity risk premium and thus results in the decrease in stock prices and returns. Furthermore, Table 5 shows that
UCTYCNSP,W has a larger effect for long forecasting horizons than for short forecasting horizons and has a larger influence on A-share
markets than on B-share markets. Finally, UCTYCNSP,W is more informative in explaining stock index returns than UCTYGVX,W in the
Chinese market. These empirical results suggest that the uncertainty index measured using UCTYCNSP,W could provide useful infor
mation for practitioners, particularly when investing in the A-share markets over a long-period.
3.2.2. Regression kink

Table 6 presents the testing of threshold effects for the weekly index returns of weeks 1, 12, 26, and 52 in the Chinese stock market
when the proxies of uncertainty are used as the threshold variables. The results reveal significant threshold effects for UCTYCNSP,W and
UCTYGVX,W at weeks 12, 26, and 52. Threshold effects are not observed in subsequent 1-week stock index returns, except for the effect
of UCTYCNSP,W on the returns of SZA and SZB. Taking the 12-week forecasting horizon for example, the F-test statistics for SHA, SHB,
SZA, and SZB are 43.5177, 48.8251, 48.6938, and 84.2280 and are all significant at the 1% level, respectively, when the threshold
variable is measured using UCTYCNSP, W. Similarly, when the threshold variable is measured using UCTYGVX, W for the 12-week
forecasting horizon, the F-stat statistics for SHA, SHB, SZA, and SZB are 58.4318, 39.7822, 50.7561, and 38.1600, respectively, all
of which are significant at the 1% level. Overall, Table 6 indicates a nonlinear effect of the uncertainty index and subsequent stock
index returns in the Chinese stock market.
Table 7 illustrates the nonlinear effect of uncertainty on the subsequent weekly index returns of SHA, SHB, SZA, and SZB for weeks
12
Table 7
C.-P. Chung et al.

Nonlinear impact of uncertainty on subsequent weekly index returns in the Chinese stock market.
n = 12 n = 26 n = 52
Coefficient Lower bound Upper bound Coefficient Lower bound Upper bound Coefficient Lower bound Upper bound
Panel A: Ri,W,W+n, i = SHA

j = CNSP βi,j,n,1 − 1.2087 − 1.7763 − 0.6410 − 2.8268 − 3.6087 − 2.0448 − 5.6192 − 6.5759 − 4.6624
βi,j,n,2 1.1487 0.4040 1.8933 2.8676 1.7174 4.0178 4.2788 3.2481 5.3095
θi,j,n 0.1789 0.1002 0.2577 0.0438 − 0.0507 0.1384 − 0.4506 − 0.5098 − 0.3914
αi,j,n − 0.0427 − 0.0612 − 0.0241 − 0.1034 − 0.1322 − 0.0747 − 0.1773 − 0.2039 − 0.1507
γi,j,n 0.5807 0.5707 0.5857 0.5857 0.5857 0.5907 0.5907 0.5907 0.5907
adjR2 0.1360 0.1685 0.3368
j = GVX βi,j,n,1 − 1.3170 − 1.8639 − 0.7700 − 2.8836 − 3.7752 − 1.9921 − 4.5401 − 5.8241 − 3.2562
βi,j,n,2 0.3909 0.2481 0.5337 1.0246 0.7798 1.2695 0.6115 0.3446 0.8784
θi,j,n 0.2702 0.1895 0.3509 0.2244 0.1471 0.3017 − 0.2858 − 0.3634 − 0.2082
αi,j,n − 0.0397 − 0.0565 − 0.0229 − 0.0999 − 0.125 − 0.0748 − 0.124 − 0.1566 − 0.0914
γi,j,n 0.2062 0.1962 0.2212 0.2112 0.2012 0.2512 0.2212 0.2012 0.2412
adjR2 0.1315 0.1557 0.2099
j = CNSP βi,j,n,1 − 1.4551 − 2.1148 − 0.7954 − 3.142 − 3.9232 − 2.3608 − 5.8105 − 6.8153 − 4.8056
βi,j,n,2 1.6335 0.7460 2.5210 3.7063 2.3319 5.0807 5.977 3.9278 8.0261
θi,j,n 0.0790 − 0.0149 0.1730 0.0572 − 0.0344 0.1488 − 0.3198 − 0.3901 − 0.2496
αi,j,n − 0.0540 − 0.0765 − 0.0314 − 0.1202 − 0.1525 − 0.0878 − 0.194 − 0.2308 − 0.1572
γi,j,n 0.5807 0.5707 0.5857 0.5857 0.5857 0.5907 0.5907 0.5907 0.5907
adjR2 0.0875 0.1592 0.2891
13
n = 12 n = 26 n = 52

j = GVX βi,j,n,1 − 1.2479 − 1.9461 − 0.5497 − 2.7658 − 3.8163 − 1.7153 − 4.0643 − 5.5033 − 2.6253
βi,j,n,2 0.4695 0.2295 0.7095 1.1962 0.8184 1.574 0.9457 0.4545 1.4368
θi,j,n 0.1557 0.0650 0.2464 0.2236 0.1458 0.3014 − 0.1885 − 0.2789 − 0.0981
αi,j,n − 0.0408 − 0.0634 − 0.0182 − 0.0993 − 0.131 − 0.0677 − 0.1105 − 0.1554 − 0.0655
γi,j,n 0.2112 0.1962 0.2462 0.2112 0.2012 0.2512 0.2212 0.2012 0.2862
adjR2 0.0640 0.1152 0.1361
Panel C: Ri,W,W+n, i = SZA
j = CNSP βi,j,n,1 − 1.5352 − 2.1343 − 0.9362 − 3.3343 − 4.1014 − 2.5673 − 6.3078 − 7.3117 − 5.3038

βi,j,n, 2 1.3194 0.5085 2.1303 3.0083 1.7828 4.2338 4.7532 3.1414 6.3651
θi,j,n 0.0899 − 0.0069 0.1867 0.0309 − 0.0552 0.1169 − 0.3493 − 0.4141 − 0.2846
αi,j,n − 0.0444 − 0.0651 − 0.0236 − 0.1012 − 0.1323 − 0.0701 − 0.1569 − 0.1896 − 0.1241
γi,j,n 0.5807 0.5707 0.5857 0.5857 0.5857 0.5907 0.5907 0.5907 0.5957
adjR2 0.1146 0.1897 0.3115
j = GVX βi,j,n,1 − 1.4295 − 2.1031 − 0.7559 − 1.2051 − 1.6272 − 0.7831 − 3.2303 − 4.1835 − 2.2771
βi,j,n,2 0.4264 0.236 0.6167 2.3078 1.8302 2.7854 1.5260 1.0519 2.0001
θi,j,n 0.1919 0.097 0.2867 0.2372 0.1614 0.3129 − 0.1379 − 0.2199 − 0.0558
αi,j,n − 0.0351 − 0.0553 − 0.0148 − 0.1309 − 0.1727 − 0.0891 − 0.138 − 0.1818 − 0.0942
γi,j,n 0.2062 0.1912 0.2412 0.3162 0.2012 0.3362 0.2562 0.2262 0.3162
adjR2 0.0872 0.1390 0.1264
(continued on next page)

C.-P. Chung et al.
Table 7 (continued )
n = 12 n = 26 n = 52
n = 12 n = 26 n = 52
Panel D: Ri,W,W+n, i = SZB

j = CNSP βi,j,n,1 − 1.2067 − 1.6643 − 0.7492 − 2.7162 − 3.3284 − 2.1039 − 4.2151 − 5.0124 − 3.4178
βi,j,n,2 2.4709 1.8088 3.133 6.1601 4.9129 7.4074 9.7448 7.8603 11.6292
θi,j,n 0.0808 0.0046 0.157 − 0.0655 − 0.1455 0.0145 − 0.4362 − 0.4968 − 0.3757
αi,j,n − 0.0467 − 0.0647 − 0.0287 − 0.1047 − 0.1314 − 0.0781 − 0.1082 − 0.1396 − 0.0767
γi,j,n 0.5857 0.5807 0.5857 0.5907 0.5857 0.5907 0.5957 0.5907 0.5957
adjR2 0.1167 0.1919 0.3347
j = GVX βi,j,n,1 − 1.0230 − 1.6203 − 0.4258 − 2.0447 − 2.9297 − 1.1598 − 2.3366 − 3.6065 − 1.0667
βi,j,n,2 0.4913 0.2829 0.6997 1.3258 0.9855 1.6662 1.0595 0.7022 1.4168
θi,j,n 0.2014 0.1230 0.2798 0.1778 0.0999 0.2557 − 0.2753 − 0.3569 − 0.1936
αi,j,n − 0.0246 − 0.0432 − 0.006 − 0.0624 − 0.0921 − 0.0327 0.0061 − 0.029 0.0413
γi,j,n 0.2062 0.1912 0.2262 0.2112 0.2012 0.2312 0.2212 0.2012 0.3112
adjR2 0.0766 0.1134 0.1649
14
This table displays the nonlinear effect of uncertainty on subsequent weekly index returns in the Chinese stock market. Weekly data are used instead of daily data for our regression analyses to reduce
statistical concerns caused by overlapping observations, without losing useful information and sample size. The nonlinear regression is performed using the regression kink model suggested by Hansen
(2017) as follows:
Ri,W,W+n = βi,j,n,1(UCTYj,W − γi,j,n)− + βi,j,n,2(UCTYj,W − γi,j,n)+ + θi,j,nRi,W− n,W + αi,j,n + εi,W,W+n
where Ri,W,W+n is the weekly index returns for index i from W to W+n. i is SHA, SHB, SZA, or SZB. SHA, and SHB are the indices of the A-shares and B-shares of the Shanghai Stock Exchange (SHSE),
respectively. SZA and SZB are the indices of the A-shares and B-shares of the Shenzhen Stock Exchange (SZSE), respectively. UCTYj,W is the proxy for uncertainty, with j = CNSP or GVX. γi,j,n is a cut-off level
of UCTYj,W. The slope with respect to the variable UCTYj,W equals βi,j,n,1 for value of UCTYj,W less than γi,j,n and equals βi,j,n,2 for value of UCTYj,W greater than γi,j,n, yet the regression function is continuous
in all variables. A lagged-dependent variable is added as a regressor to ensure that the errors εi,W,W+n are approximately serially uncorrelated. εi,W,W+n is the residual for index i from W to W+n. UCTYCNSP,W
is a weekly uncertainty index, measured using the volatility spillover index of the Chinese stock market. UCTYGVX,W is the weekly uncertainty index of global stock markets, measured using the global
implied volatility index (GVX). UCTYGVX,W is the average of six developed stock markets’ weekly implied volatility indices. The weekly index returns are calculated based on the weekly prices on
Wednesday (Wednesday close to Wednesday close) following Griffin et al. (2007) and Chuang et al. (2014). The weekly uncertainty indices for UCTYCNSP,d and UCTYGVX,d are calculated by the average of

the daily uncertainty indices for UCTYCNSP,d and UCTYGVX,d from Wednesday to Wednesday, respectively. UCTYCNSP,d is estimated using a 300-day rolling sample. Panels A to D display the regression
results for SHA, SHB, SZA, and SZB. Following the approach of Hansen (2017), the bootstrap method is employed to obtain the confidence intervals for parameters because the limiting distribution is non-
standard. The lower and upper bounds are 95% confidence intervals, which are used to examine the significance of regression coefficients.
Table 6
Testing for threshold effects of the Chinese stock market with F-stat.
F-stat n=1 n = 12 n = 26 n = 52
j = CNSP j = GVX j = CNSP j = GVX j = CNSP j = GVX j = CNSP j = GVX
i = SHA 6.1262 4.8097 43.5177*** 58.4318*** 84.5546*** 118.9595*** 125.8346*** 100.6671***

i = SHB 3.9923 3.3522 48.8251*** 39.7822*** 96.4429*** 86.2617*** 135.1431*** 65.4436***
i = SZA 6.8322** 3.1301 48.6938*** 50.7561*** 90.9414*** 104.0496*** 126.2521*** 79.0059***
i = SZB 8.5175*** 3.5381 84.2280*** 38.1600*** 189.0010*** 80.6596*** 236.5155*** 44.1029***
This table displays the testing of threshold effects for the weekly index returns in the Chinese stock market when the proxies of uncertainty are used as
the threshold variables. Weekly data are used instead of daily data for our regression analyses to reduce statistical concerns caused by overlapping
observations, without losing useful information and sample size. The threshold effects are tested using the regression kink model suggested by Hansen
(2017) as follows:
Ri,W,W+n = βi,j,n,1(UCTYj,W − γi,j,n)− + βi,j,n,2(UCTYj,W − γi,j,n)+ + θi,j,nRi,W− n,W + αi,j,n + εi,W,W+n
where Ri,W,W+n is the weekly index returns for index i from W to W+n. i is SHA, SHB, SZA, or SZB. SHA and SHB are the indices of the A-shares and B-
shares of the Shanghai Stock Exchange (SHSE). SZA and SZB are the indices of the A-shares and B-shares of the Shenzhen Stock Exchange (SZSE).
UCTYj,W is the proxy for uncertainty, with j = CNSP or GVX. γi,j,n is the cut-off level of UCTYj,W. The slope of the variable UCTYj,W equals βi,j,n,1 for
value of UCTYj,W less than γi,j,n and equals βi,j,n,2 for value of UCTYj,W greater than γi,j,n, yet the regression function is continuous in all variables. A
lagged-dependent variable is added as a regressor to ensure that the errors εi,W,W+n are approximately serially uncorrelated. εi,W,W+n is the residual for
index i from W to W+n. UCTYCNSP,W is a weekly uncertainty index, measured using the volatility spillover index of the Chinese stock market.
UCTYGVX,W is the weekly uncertainty index of global stock markets, measured using the global implied volatility index (GVX). UCTYGVX,W is the
average of six developed stock markets’ weekly implied volatility indices. The weekly index returns are calculated based on the weekly prices on
Wednesday (Wednesday close to Wednesday close) following Griffin et al. (2007) and Chuang et al. (2014). The weekly uncertainty indices for
UCTYCNSP,W and UCTYGVX,W are calculated by the average of the daily uncertainty indices for UCTYCNSP,d and UCTYGVX,d from Wednesday to
Wednesday, respectively. UCTYCNSP,d is estimated using a 300-day rolling sample. The bootstrap method is employed to compute the p-value of an F-
stat because the limiting distribution is non-standard (Hansen 2017). F-stat is used to explore a threshold effect.
** and *** indicate significance at the 0.05 and 0.01 levels, respectively.
12, 26, and 52. Panels A to D of Table 7 display the results of the regression kink model for SHA, SHB, SZA, and SZB. The empirical
results for SHA, SHB, SZA, and SZB are similar. Therefore, we focus on the interpretation of SHA, which is displayed in Panel A of
Table 7. Panel A of Table 7 illustrates that the uncertainty indices for UCTYCNSP,W and UCTYGVX,W exert a nonlinear effect (e.g., V-
shaped relationship) on subsequent index stock returns of SHA. Taking the 12-week forecasting horizon with the uncertainty index of
UCTYCNSP,W for example, the results indicate that the threshold value, γSHA,CNSP,12, is 0.5807. The regression coefficient of UCTYCNSP,W
is − 1.2087 and is significant at the 5% level when UCTYCNSP,W is less than 0.5807. By contrast, when UCTYCNSP,W is larger than 0.5807,
the regression coefficient of UCTYCNSP,W is 1.1487 and is significant at the 5% level. In a similar vein, a V-shaped relationship is
observed between the uncertainty index of UCTYGVX,W and subsequent SHA index returns. The findings on the 12-week forecasting
horizon with the uncertainty index of UCTYGVX,W indicate that the threshold value, γSHA,GVX,12, is 0.2062. When UCTYGVX,W is less than
0.2062, the regression coefficient of UCTYGVX,W is − 1.3170 and is significant at the 5% level. As UCTYGVX,W is higher than 0.2062, the
regression coefficient for UCTYGVX,W is 0.3909 and is significant at the 5% level. Similar results are also observed for the forecasting
horizons of weeks 26 and 52. Fig. 3 displays the V-shaped relationship between the uncertainty index measured by UCTYCNSP,W and
UCTYGVX,W and the 52-week forecasting horizon of stock index returns of SHA, SHB, SZA, and SZB. Fig. 3 presents the V-shaped
relationship between the uncertainty indices and stock index returns in the Chinese stock market. The findings of Table 7 and Fig. 3 are
consistent with the nonlinearity of risk premia suggested by He and Krishnamurthy (2013), which can be interpreted as follows. An
increase in the uncertainty leads to a higher equity risk premium when the uncertainty is below the threshold value. Based on the
discount of the expected cash flows, a higher risk premium results in lower asset prices and asset returns. However, an increase in the
uncertainty leads to a monetary stimulus caused by the collapse of real economic activity when the uncertainty is higher than the
threshold value, which decreases the equity risk premium. A lower risk premium results in higher asset prices and returns according to
the discount of the expected cash flow. Therefore, the evidence presented in Table 7 and Fig. 3 is consistent with Hypothesis 2.
Furthermore, Table 7 suggests that UCTYCNSP,W has a higher explanatory power for the stock index returns in the Chinese stock
market than UCTYGVX,W for a given forecasting horizon with the stock index i. For example, for the 52-week forecasting horizon with
the stock index SHB, the values of adjR2 for UCTYCNSP,W and UCTYGVX,W are 0.2891 and 0.1361, respectively. These findings can be
explained as follows. UCTYCNSP,W reflects uncertainty shocks from both the global and local stock markets, whereas UCTYGVX,W is
correlated with systemic risk in the global stock markets. Therefore, UCTYCNSP,W has a higher explanatory power for index returns in
the Chinese stock markets. This finding supports Hypothesis 3. Furthermore, regardless of UCTYCNSP,W and UCTYGVX,W, the results of
the nonlinear regression displayed in Table 7 present a higher value of adjR2 for long forecasting horizons than those of short fore
casting horizons. The finding is in line with the linear regression model presented in Table 5. Finally, compared with the findings
presented in Table 5, the value of adjR2 is higher for the nonlinear regression models than for the linear models, indicating that the
nonlinear model captures the relationship between the uncertainty index and subsequent Chinese stock returns more accurately.
3.3. Robustness check
For a robustness check, the generalized VAR model with a 250-day rolling sample is used to estimate the dynamic spillovers and
15
(caption on next page)
16
Fig. 3. Nonlinear impact of uncertainty on subsequent weekly index returns in the Chinese stock market, n = 52. SHA and SHB are the indices of the
A- and B-shares of the Shanghai Stock Exchange (SHSE). SZA and SZB are the indices of the A- and B-shares of the Shenzhen Stock Exchange (SZSE).
UCTYj,W is the proxy of uncertainty, where j = CNSP or GVX. UCTYCNSP,W is an weekly uncertainty index which is measured by the volatility
spillover index of China’s stock markets. UCTYGVX,W is the weekly uncertainty index of global stock markets and is measured by the global implied
volatility index (GVX). The weekly uncertainty indices for UCTYCNSP,W and UCTYGVX,W are calculated by the average of the daily uncertainty indices
for UCTYCNSP,d and UCTYGVX,d from Wednesday to Wednesday, respectively. UCTYCNSP,d is estimated with a 300-day rolling sample.
Table 8
Robustness check: Descriptive statistics for volatility spillovers with rolling approach.
∆ln(σSHA) ∆ln(σSHB) ∆ln(σSHA) ∆ln(σSHB)
Panel A: Directional spillovers, To∙←i

Mean 0.1591 0.1324 0.1615 0.1102
Median 0.1637 0.1341 0.1635 0.1127
Std 0.0176 0.0182 0.0149 0.0238
Minimum 0.1005 0.0882 0.1081 0.0501
Maximum 0.1881 0.1781 0.1920 0.1511
Panel B: Directional spillovers, Fromi←∙
Mean 0.1455 0.1399 0.1470 0.1308
Median 0.1480 0.1395 0.1482 0.1335
Std 0.0118 0.0158 0.0109 0.0200
Minimum 0.1112 0.1035 0.1113 0.0678
Maximum 0.1668 0.1683 0.1676 0.1646
Panel C: Directional spillovers, Neti
Mean 0.0136*** − 0.0075*** 0.0145*** − 0.0206***
Median 0.0146 − 0.0092 0.0139 − 0.0202
Std 0.0106 0.0146 0.0095 0.0100
Minimum − 0.0172 − 0.0371 − 0.0148 − 0.0462
Maximum 0.0427 0.0319 0.0405 0.0093
This table presents the descriptive statistics of the dynamic (rolling) directional spillovers. Panels A to C display the spillovers for “To,” “From,” and
“Net” for the logarithm difference in annualized daily volatility between the indices of the A-shares and B-shares of the Shanghai Stock Exchange
the indices of the A-shares and B-shares of the SZSE, respectively. Following Diebold and Yilmaz (2016), daily range-based volatility is computed
√̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅
σi,d = 100 × 365 × σ2i,d
This paper uses the generalized vector autoregressive (VAR) framework proposed by Diebold and Yilmaz (2012, 2014) to estimate the rolling
spillovers. The generalized VAR model is estimated on the vector of the logarithm difference in annualized daily volatility following Yang et al.
(2020). The generalized VAR model with a 250-day rolling sample is used to estimate the dynamic spillovers. The number of optimal lags is
determined using the Schwarz Information Criterion (SIC), and the generalized variance decompositions of 10-day-ahead forecast errors are
employed for our analysis. A total of 4815 directional spillovers are thus obtained from December 17, 2001 to May 29, 2020.
examines whether Hypotheses 1 to 3 hold. Table 8 displays the descriptive statistics for the dynamic (rolling) directional spillovers.
Panels A to C in Table 8 display the spillovers for “To,” “From,” and “Net” of the logarithm difference in annualized daily volatility in
the A-shares and B-shares indices of the SHSE and the SZSE. Panel C of Table 8 indicates that the mean values of the net volatility
spillovers of SHA, SHB, SZA, and SZB are 0.0136, − 0.0075, 0.0145, and − 0.0206, respectively and the t-test statistics of the mean
values are all significant at the conventional level. These results indicate that the A-share markets are the net exporters of volatility
related to future uncertainty compared with B-share markets, which is consistent with Hypothesis 1.
Table 9 presents evidence of the nonlinear effect of uncertainty on the subsequent 52-week index returns in the Chinese stock
market when the total volatility spillover index of the Chinese stock market is constructed using a 250-day rolling sample. The results
present a V-shaped relationship for the effect of UCTYCNSP,W and UCTYGVX,W on the subsequent 52-week index returns. For example,
for the stock index return SHA with the uncertainty index measured by UCTYCNSP,W (UCTYGVX,W), the evidence presents that the
threshold value, γSHA,CNSP,52 (γSHA,GVX,52), is 0.5949 (0.2214). When UCTYCNSP,W (UCTYGVX,W) is less than 0.5949 (0.2214), the
regression coefficient of UCTYCNSP,W (UCTYGVX,W) is − 4.6576 (− 4.4041) and is significant at the 5% level. As UCTYCNSP,W (UCTYGVX,
W) is larger than 0.5949 (0.2214), the regression coefficient of UCTYCNSP,W (UCTYGVX,W) is 3.8999 (0.6093) and is significant at the 5%
level. This finding is consistent with Hypothesis 2. Our findings further indicate that the uncertainty index measured by UCTYCNSP,W
provides more information on the stock index returns in the Chinese stock market than UCTYGVX,W. For instance, the adjR2 values of the
stock index return SHA are 0.3142 and 0.2046 for UCTYCNSP,W and UCTYGVX,W, respectively, which indicates that UCTYCNSP,W predicts
17
Table 9
Robustness check: Nonlinear impact of uncertainty on subsequent 52-week index returns in the Chinese stock market, 250-day rolling.
UCTYj,W,j = CNSP UCTYj,W,j = GVX
Coefficient Lower bound Upper bound Coefficient Lower bound Upper bound
Panel A: Ri,W,W+n, i = SHA and n = 52

βi,j,n,1 − 4.6576 − 5.4470 − 3.8682 − 4.4041 − 5.6474 − 3.1609
βi,j,n,2 3.8999 2.7007 5.0990 0.6093 0.3516 0.8671
θi,j,n − 0.4074 − 0.4728 − 0.3420 − 0.2838 − 0.3614 − 0.2062
αi,j,n − 0.1667 − 0.1948 − 0.1385 − 0.1231 − 0.1532 − 0.093
γi,j,n 0.5949 0.5899 0.6049 0.2214 0.2064 0.2464
adjR2 0.3142 0.2046
F-stat 99.3988*** 99.3794***
Panel B: Ri,W,W+n, i = SHB and n = 52
βi,j,n,1 − 4.9287 − 5.8148 − 4.0426 − 3.9228 − 5.3362 − 2.5094
βi,j,n,2 4.4831 2.3156 6.6506 0.9404 0.4453 1.4355
θi,j,n − 0.299 − 0.3724 − 0.2256 − 0.1874 − 0.2765 − 0.0983
αi,j,n − 0.1667 − 0.2045 − 0.1289 − 0.1089 − 0.1528 − 0.065
γi,j,n 0.5899 0.5849 0.5949 0.2214 0.2014 0.3014
adjR2 0.2598 0.1342
F-stat 100.1469*** 63.7082***
UCTYj,W,j = CNSP UCTYj,W,j = GVX
Coefficient Lower bound Upper bound Coefficient Lower bound Upper bound
Panel C: Ri,W,W+n, i = SZA and n = 52

βi,j,n,1 − 5.1693 − 6.0274 − 4.3113 − 3.0882 − 4.0070 − 2.1693
βi,j,n,2 4.4640 2.3523 6.5756 1.5034 1.0260 1.9807
θi,j,n − 0.2998 − 0.3695 − 0.2300 − 0.1368 − 0.2167 − 0.0568
αi,j,n − 0.1475 − 0.1838 − 0.1113 − 0.133 − 0.1754 − 0.0907
γi,j,n 0.5949 0.5899 0.6049 0.2564 0.2314 0.3264
2
adjR 0.2790 0.1208
F-stat 99.6995*** 77.6940***
Panel D: Ri,W,W+n, i = SZB and n = 52
βi,j,n,1 − 3.2868 − 3.8978 − 2.6759 − 2.1836 − 3.4104 − 0.9569
βi j,n,2 10.4456 7.246 13.6453 1.0604 0.6957 1.4250
θi,j,n − 0.4029 − 0.4664 − 0.3395 − 0.2717 − 0.3504 − 0.1929
αi,j,n − 0.0938 − 0.128 − 0.0595 0.0073 − 0.0264 0.0410
γi,j,n 0.6049 0.5999 0.6099 0.2214 0.2014 0.3164
2
adjR 0.3057 0.1621
F-stat 192.8217*** 41.3308***
This table displays the nonlinear effect of uncertainty on subsequent weekly index returns in the Chinese stock market. Weekly data are used instead
of daily data for our regression analyses to reduce statistical concerns caused by overlapping observations, without losing useful information and
sample size. The nonlinear regression is performed using the regression kink model suggested by Hansen (2017) as follows:
Ri,W,W+n = βi,j,n,1(UCTYj,W − γi,j,n)− + βi,j,n,2(UCTYj,W − γi,j,n)+ + θi,j,nri,W− n,W + αi,j,n + εi,W,W+n
where Ri,W,W+n is the weekly index returns for index i from W to W+n. i is SHA, SHB, SZA, or SZB. SHA and SHB are the indices of the A-shares and B-
shares of the Shanghai Stock Exchange (SHSE), respectively. SZA and SZB are the indices of the A-shares and B-shares of the Shenzhen Stock Exchange
(SZSE), respectively. UCTYj, W is the proxy for uncertainty, with j = CNSP or GVX. γi,j,n is a cut-off level of UCTYj,W. The slope with respect to the
variable UCTYj,W equals βi,j,n,1 for value of UCTYj,W less than γi,j,n and equals βi,j,n,2 for value of UCTYj,W greater than γi,j,n, yet the regression function is
continuous in all variables. A lagged-dependent variable was included as a regressor to ensure that the errors εi,W,W+n are approximately serially
uncorrelated. εi,W,W+n is the residual for index i from W to W+n. UCTYCNSP,W is the weekly uncertainty index, measured using the volatility spillover
index of the Chinese stock market. UCTYGVX,W is the weekly uncertainty index of global stock markets, measured using the global implied volatility
index (GVX). UCTYGVX,W is the average of six developed stock markets’ weekly implied volatility indices. The weekly index returns are calculated
based on the weekly prices on Wednesday (Wednesday close to Wednesday close) following Griffin et al. (2007) and Chuang et al. (2014). The weekly
uncertainty indices for UCTYCNSP,d and UCTYGVX,d are calculated by the average of the daily uncertainty indices for UCTYCNSP,d and UCTYGVX,d from
Wednesday to Wednesday, respectively. UCTYCNSP,d is estimated using a 250-day rolling sample. Panels A to D display the regression results for SHA,
SHB, SZA, and SZB. Following Hansen (2017), the bootstrap method was employed to compute the p-value of an F-stat and obtain the confidence
intervals for parameters, because the limiting distribution is non-standard. F-stat is used to explore the threshold effect. The lower and upper bounds
are 95% confidence intervals, which are used to examine the significance of regression coefficients.
stock index returns SHA more accurately than UCTYGVX,W. The finding supports Hypothesis 3. Finally, our empirical results indicate
that the values of adjR2 for the regression kink models are all higher than the linear regression models, indicating that the nonlinear
model explains the relationship between the uncertainty index and subsequent Chinese stock returns more accurately.
4. Conclusions
The primary purposes of the present study are to examine the net directional and total volatility spillovers in the Chinese stock
18
market and investigate the effects of the uncertainty indices measured by the total volatility spillover index of the Chinese stock market
and the global volatility index on Chinese stock index returns. This paper explores these issues based on the framework of the
generalized forecast error variance decompositions proposed by Diebold and Yilmaz (2012, 2014). Since the positive (negative) net
volatility spillovers estimated by the approach of Diebold and Yilmaz (2012, 2014) represents a net exporter (importer) of future
uncertainty, it allows us to understand how uncertainty shocks are incorporated and transmitted in the Chinese stock market. In
addition, the framework by Diebold and Yilmaz (2012, 2014) allows us to construct a uncertainty index for the Chinese stock market,
and thus this paper can further investigate how a uncertainty index measured by the total volatility spillover index affects subsequent
index returns of the Chinese stock market.
Using the indices of the A- and B-shares of the SHSE and the SZSE during the sample period from January 2, 2001 to May 29, 2020,
our empirical evidence first show that the A-share markets play a more pronounced role than the B-share markets in transmitting
uncertainty shocks, indicating that A-shares are the net exporters of future uncertainty to B-shares. Furthermore, the uncertainty
indices measured by the total volatility spillover index and the global volatility index have a nonlinear effect on subsequent stock index
returns in the Chinese stock market. The nonlinear relationship between the uncertainty indices and subsequent stock index returns is
V-shaped. This finding is consistent with the argument of the nonlinear risk–return trade-off suggested by He and Krishnamurthy
(2013) and Adrian et al. (2019). Finally, our findings indicate that the uncertainty index measured by the total volatility spillover
reflects the local and global uncertainty shocks and thus provides more information on subsequent stock index returns in the Chinese
stock market than the global volatility index.
The present paper provides several directions for future research. First, the analytical tool of the Diebold–Yilmaz framework is
estimated using the VAR model, which is stacked univariate regression models of variances. As such, the importance of covariance
dynamics is not considered in the Diebold–Yilmaz framework (Zhou et al. 2012). Thus, the dynamic covariance can be incorporated
into the measurement of volatility spillovers as suggested by Fengler and Gisler (2015) for future research. Second, the Diebold–Yilmaz
framework does not distinguish the asymmetry in spillovers associated with bad and good uncertainties. It is reasonable to expect that
the magnitude of volatility spillovers is asymmetric for bad and good volatility. Future research could address this limitation using the
model suggested by Baruník et al. (2016).
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Pacific-Basin Finance Journal 65 (2021) 101466

Contents lists available at ScienceDirect

Pacific-Basin Finance Journal

Volatility spillovers of A- and B-shares for the Chinese stock

1.1. Institutional background, related literature, and hypotheses

2. Data and methodology

2.2. Measurement of net directional and total volatility spillovers

where Aι is N × N coefficient matrices and satisfies the following recursive relations:

Panel A: Mean value

Finally, net-spillovers are calculated as follows:

2.3. Regression kink model

∆ln(σSHA) 1.0000 0.6125 0.8363 0.5504

3.1. Descriptive statistics

3.1.1. Descriptive statistics for volatility

Panel A: Directional spillovers, To∙←i

3.1.2. Descriptive statistics for directional and total volatility spillovers

Mean 0.5636 0.2143

3.2. Effect of uncertainty on subsequent index returns

3.2.1. Linear regression

Pacific-Basin Finance Journal 65 (2021) 101466

j = CNSP j = GVX j = CNSP j = GVX j = CNSP j = GVX j = CNSP j = GVX

Panel A: Ri,W,W+n, i = SHA

3.2.2. Regression kink

C.-P. Chung et al.

Panel A: Ri,W,W+n, i = SHA

Panel B: Ri,W,W+n, i = SHB

Pacific-Basin Finance Journal 65 (2021) 101466

(continued on next page)

Panel D: Ri,W,W+n, i = SZB

Pacific-Basin Finance Journal 65 (2021) 101466

j = CNSP j = GVX j = CNSP j = GVX j = CNSP j = GVX j = CNSP j = GVX

i = SHA 6.1262 4.8097 43.5177*** 58.4318*** 84.5546*** 118.9595*** 125.8346*** 100.6671***

3.3. Robustness check

(caption on next page)

Panel A: Directional spillovers, To∙←i

Panel A: Ri,W,W+n, i = SHA and n = 52

UCTYj,W,j = CNSP UCTYj,W,j = GVX

Panel C: Ri,W,W+n, i = SZA and n = 52

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i = SHA 6.1262 4.8097 43.5177* 58.4318* 84.5546* 118.9595* 125.8346* 100.6671*