Analysis of stock return volatility in new third board market

based on ARCH-type model

1 Motivation
With the development of the economy, the country attaches more and more
importance to the innovative development of small and medium-sized enterprises
and the deepening of the reform of the capital market. As the main capital market
for the development of small and medium-sized enterprises, the New Third Board
market must strive to build a standardized, transparent, open, dynamic and
resilient capital market. There is a close interaction between the fluctuation of
stock return rate and the economic development of small and medium-sized
enterprises in the New Third Board market. The two influence each other and
cause and affect each other. The stock return rate has increasingly become the
"barometer" of the economic development of listed enterprises in the New Third
Board market.

In this paper, ARCH model is used to select representative stock return rate data
of the New Third Board market, describe the current development status of the
new Third Board market, and analyze the volatility of stock return rate of the
New Third Board market. Based on this, the paper puts forward policy
suggestions for the selection of investors, the development of listed enterprises
and the improvement of the New Third Board market.

2 Empirical model specification

2.1 ARCH model.
The conditional mean value equation and conditional variance equation
described by ARCH(q) process are as follows:

{
y t =γ xt +ε t
q
σ t =ω+ ∑ α i ε t −i
2 2

i=1

Where ε t is the residual term with an expectation of 0, which is usually

assumed to follow the normal distribution and t distribution; 2 is the
σt
conditional variance of the residual term ε t, and when it is stationary, ω>0,
q
α i>0, ∑ αi<1. Parameter α i represents the influence coefficient of external
i=1

impact.

2.2 TARCH model.

 The conditional variance equation described by TARCH(p, q) process is:
q q r
σ =ω+ ∑ α ε + ∑ β j σ
2
t
2
i t −i
2
t −i + ∑ γ k ε 2t−k d t−k
i=1 j =1 k=1

t
{
Where d = 1 ,∧ε t −k < 0 , >0, α >0, β ≥0, d is the dummy variable. When
0 ,∧ε t−k ≥ 0
ω i j t

the bad news comes, the ε t−k <0 , d t =1; On the contrary, the good news
occurs, ε t−k ≥0 , d t =0. When γ k >0 and is significant, there is an asymmetric
effect, good news brings bigger impact than bad news.

3 Data Selection
In order to study the return rate of the New Third Board stock market, This paper
analyzes the daily rise and fall data of the third board service (National Small and
medium-sized Enterprise Share Transfer System private technology Service
Index), the third board research and development (National Small and medium-
sized Enterprise Share transfer System research and development index) and the
third board activity (National Small and medium-sized enterprise share transfer
System active stock index) respectively from three perspectives: technical service
level, research and development status, and trading activity. In this paper, the
sample data of stock index growth and decline in the period from December 21,
2018 to December 31, 2021 are selected for the following reasons: first, the
number and trading volume of the third board service, the third board research
and development, and the active component stocks of the third board all have a
considerable scale, the methods of index compilation are constantly improved,
and the index sequence is long and easy to analyze, with good representativeness;
Second, this period is a period of comprehensively deepening the reform of the
New Third Board, a period of easing financing and taxation standards for private
enterprises and small and medium-sized enterprises across the country, and a
period of remarkable reform and development. Therefore, the sample data in this
section can better reflect the reality, reduce the interference of outliers, and the
results of empirical analysis will be more accurate.

4 Empirical Results
4.1 Analysis on the basic statistical characteristics of the New Third Board
stock return rate
4.1.1 Normality test
According to the statistical results, the average daily return rate of the
service stocks of the third board, the research and development stocks
of the third board and the active stocks of the third board are all
positive, among which the active stocks of the third board have the
highest average daily return rate and the service stocks of the third
board have the lowest average daily return rate. The fluctuation range
and standard deviation of the three board active stocks are the largest,
 which is in line with the characteristics of financial asset investment
and risk proportional. The rate of return skew of each index is positive,
and the rate of return of each three board stock index is to the right,
that is, in the new three board stock market, the probability of positive
rate of return is greater than the probability of negative rate of return.
In addition, the kurtosis of each three board stock index is greater than
3, showing a peak distribution, indicating that the New Three Board
stock market has a certain speculative color, and the market volatility is
relatively strong. According to the results of descriptive statistics, the
daily returns of the three boards all present a "peak and thick tail"
distribution, which does not obey the normal distribution.

4.1.2 Stability test

In order to avoid the phenomenon of "pseudo regression", the
stationarity test should be carried out before the model estimation.
Augmented Dickey-Fuller test (ADF) is used to determine whether
there is unit root in time series under the set significance level. In this
paper, the ADF test with intercept term but no trend term is selected as
the original sample data column. The test results (Table 2) show that at
the significance level of 5% and 1%, the random walk null hypothesis
is rejected, that is, there is no unit root, indicating that the daily return
sequence of service stocks, research and development stocks and active
stocks of the third board is stable.

Test-Type ADF 5% 1%
Variables Conclusion
(c, n, k) Test Level Level
Active (1,0,0) -23.443 -2.865 -3.439 Stable
Service (1,0,0) -30.452 -2.865 -3.439 Stable
R&D (1,0,0) -23.580 -2.865 -3.439 Stable

4.1.3 Residual sequence autocorrelation test

4.1.3.1 Construction of autoregressive model
In the financial investment market, investors pay attention to the
 future value of the return on assets before making investments.
Such univariate time series can only consider the correlation
relationship, regardless of causality. Therefore, an autoregressive
model, namely AR(m) model, is constructed for the three stocks.
The information criterion determines that all three stocks adopt
AR(1) model. OLS was used to estimate the parameters of the
AR(1) model for the three stocks, and the results in Table 3
showed that all estimates were significant at the 1% confidence
level.

Variable
Constance AR(1)
s
Active 0.1623 0.143
Service 0.038 -0.121
R&D 0.102 0.136

4.1.3.2 Residual square sequence correlation test

OLS was used to estimate the parameters of the autoregressive
model of the three stocks, and ARCH-LM was used to test
whether ARCH effect existed in each residual sequence {ε t}. The
results show that the residual square sequence { 2} of the three
εt
stock AR(1) models is significant, that is, the residual sequence
has a significant ARCH effect.

Variables Lags(p) Chi2 df Prob > Chi2

Active 1 22.436 1 0.0000
Service 1 13.574 1 0.0002
R&D 1 38.984 1 0.0000

4.2 Construction and verification of ARCH class model

4.2.1 Construction and verification of ARCH model
After residual series correlation test, it can be seen that conditional
heteroscedasticity exists in the disturbance term {ε t} estimated by OLS
of AR(1) model, that is, there is volatility aggregation. In order to
eliminate the influence of conditional heteroscedasticity on the daily
returns of the three stocks, ARCH(q) model is constructed. When the q
value is too large, GARCH model is used for optimization. In order to
determine q, it is necessary to distinguish the residual square sequence
{ 2} by information criterion and determine the autoregressive order.
εt
 La
Variables LL df P AIC HQIC SBIC
g
6.05
1 -2224.435 1 0 6.063 6.071
8
Active
6.06
2 -2221.893 1 0.875 6.070 6.081
2
3.39
1 -1244.346 1 0 3.396 3.404
1
Service
3.39
2 -1243.138 1 0.957 3.403 3.414
5
5.08
1 -1866.680 1 0 5.090 5.097
5
R&D
5.08
2 -1864.148 1 0.359 5.095 5.106
8
Judging from the information criterion in the above table, it is
reasonable for all three stocks to choose ARCH(1) model, and q=1 is
small at this time, so it is unnecessary to use GARCH model for
optimization. On this basis, the parameters of ARCH(1) model are
estimated. The results showed that each parameter to be estimated was
significant at the 1% confidence level.

Variable
Constance ARCH(1)
s
Active 0.805 0.262
Service 0.323 0.171
R&D 0.541 0.249

4.2.2 Construction and verification of TARCH model

The premise of parameter estimation of ARCH model holds that there
is a symmetrical effect of information shock in the process of asset
investment, that is, "good news" and "bad news" have the same impact
on the volatility of asset investment price. But in the actual process, the
information impact of the stock market often shows asymmetric effect.
Among ARCH models, there are TARCH model and EGARCH model
that can describe asymmetric effects. This paper constructs
TARCH(0,1) model to test whether there is asymmetric effect in the
volatility of the three stocks' daily returns.

Constanc TARCH(1)
Variables ARCH(1)
e
Active 0.659 0.581 -0.290
Service 0.373 0.356 -0.228
R&D 0.418 0.549 -0.324
 It can be seen from the TARCH model in above table that service
stocks, research and development stocks and active stocks of the three
boards all have obvious asymmetric effects, among which the active
stocks of the three boards have the largest scale of asymmetric effect.
The signs of the estimated values of the asymmetric effect size
parameter are all positive, indicating that the impact of "good news" on
the volatility of asset prices is greater than that of "negative
information", which is exactly the same as the deepening reform of the
New Third Board market.

5 Reference
[1] Jian, Z., Ke, B., & Yingying, W. (2020). Analysis of stock return volatility in new
third board market based on ARCH-type model. Prices in China(11),76-80.