Question

CBOE China ETF Volatility Index (VXFXI) was about 32% recently while the VIX volatility index (for SP500) was about 24%. Discuss reasons for the difference in risk (volatility) between China and US stock markets.

Answer 1

ANSWER:

The reasons for the difference in risk between china and us stock markets are:

1. IPOs prices are controlled by the state in china while in US they aren't and as a result even on days where the market is falling in china , the IPOs have risen meaning people earn profits in the short term almost every time.

2. Trading stocks with borrowed money is common around the world but in china it is more then the world average of 80%.

3. High leverage that is debt to equity ratio is the other reason why stocks rise in china more then the US and when the companies default it results in more then usual fluctuation of stock prices.

4. New punters are trading in chineese market account for nearly 90% of trade in the equity markets who have no previous on hand experience of disasters like the 2007 -08 recession and therefore they play for the short term which results in more fluctuation and volatality in the chineese market.

5. Since borrowing stock are high and the only reliable way to hedge is index futures in china and if somebody are into the tech and healthcare sector , then it is not helpful and if the market falls , the only way to lessen the exposure is to buy or sell and therefore it leads to a lot more volatility.