Dynamic correlation and volatility spillover between the stock markets of Shenzhen and Hong Kong

Abstract

Considering the two-way spillovers of market information, this paper establishes multivariate GARCH models to study the impact of Shenzhen-Hong Kong Stock Connect (SHSC) on the complex co-movements relation between the stock markets of Shenzhen and Hong Kong from the aspects of dynamic correlation and volatility spillover. On the one hand, a t-Copula DCC-GARCH model which combines the Copula function with the DCC-GARCH model is established to model the return rate series of stock index in different stages, and the characteristic that the dynamic correlation coefficient changes with time is analyzed emphatically. On the other hand, a BEKK-GARCH model is established to measure the changes of the volatility spillover effect between the stock markets in Shenzhen and Hong Kong. The results show that the opening of SHSC has gradually increased the dynamic correlation coefficient of the two stock markets, and the openness degree of the two stock markets has increased. At the same time, the volatility spillovers of stock markets in Shenzhen and Hong Kong have shifted from one-way spillover to two-way spillovers, which indicates that the SHSC mechanism has strengthened the correlation degree and has improved the ability of risk spillover in the two stock markets.