Capturing the Risk Dynamics of the A‐Share Market Based on the Markov Regime‐Switching Method

ABSTRACT Stock market uncertainty threatens investors' profit gains, affects asset pricing, and challenges financial stability. This research investigates the dynamics of China A‐share market risks represented by volatility, value at risk (VaR), and expected shortfall (ES) and then compares the A‐share market with the 12 major stock markets in the world. The novelty of this study is that it considers the structural breaks of the market under a non‐linear framework by incorporating a Markov regime‐switching process and quantile regression in the analysis. This study aims to improve the risk management strategies of investors, particularly those with a risk‐averse appetite or those interested in emerging countries. The results suggest that high volatility accompanied by high downside losses defines the nature of risk in the A‐share market. This finding provides empirical evidence supporting the view that the A‐share market is riskier than most of the selected markets both from the general risk and left‐tail risk perspectives. This study employs quantile regression to identify the global factors that may increase the likelihood of the A‐share market remaining volatile. The results show that the key driving force is price rather than return and volatility of the oil, gold, global stock, and US dollar markets. Moreover, global financial uncertainty and the 10‐year US treasury bond yield influence state probability. Nevertheless, the impact of global driving forces varies across quantiles. This study enriches the literature on the stock market by revealing a number of general and left‐tail risk dynamics and by identifying the underlying market regime‐switching process. This study is the first to identify the global driving forces affecting the state probability of the A‐share market.