Relaxation dynamics of aftershocks after large volatility shocks in the SSEC index

TL;DR

This study analyzes the relaxation patterns of aftershocks following large volatility shocks in the Shanghai Stock Exchange, revealing power-law decay in aftershock occurrence rates that differ from seismic laws.

Contribution

It introduces a new approach by defining main shocks through large volatility rather than crashes, and examines high-frequency data to uncover power-law relaxation in financial volatility.

Findings

Aftershock occurrence rate decays as a power law.

Power-law exponent increases with volatility threshold.

Relaxation behavior significantly differs from seismic Omori law.

Abstract

The relaxation dynamics of aftershocks after large volatility shocks are investigated based on two high-frequency data sets of the Shanghai Stock Exchange Composite (SSEC) index. Compared with previous relevant work, we have defined main financial shocks based on large volatilities rather than large crashes. We find that the occurrence rate of aftershocks with the magnitude exceeding a given threshold for both daily volatility (constructed using 1-minute data) and minutely volatility (using intra-minute data) decays as a power law. The power-law relaxation exponent increases with the volatility threshold and is significantly greater than 1. Taking financial volatility as the counterpart of seismic activity, the power-law relaxation in financial volatility deviates remarkably from the Omori law in Geophysics.