Chinese stock market volatility and the role of U.S. economic variables

•We forecast the Chinese stock market volatility using the US economic variables.•We compare the predictive power of US economic variables with that of China for the Chinese stock volatility.•The predictive ability of US economic variables is robust for the out-of-sample setting and industry portfolio returns.

This paper investigates the effects of U.S. economic variables on the time variation of Chinese stock market volatility. We find that U.S. economic variables such as the dividend price ratio, dividend yield and industrial production strongly forecast the future monthly volatilities of the Chinese stock market. The predictability is statistically and economically significant and can be further improved when combining the information in all U.S. economic variables together. Forecast encompassing tests and regression tests show that the forecasting power of U.S. economic variables is incremental when comparing with the Chinese domestic economic variables. Our findings are robust for the out-of-sample analysis and a number of Chinese industry portfolios volatilities.