International linkages of the Chinese stock exchanges: a multivariate GARCH analysis

Abstract

This paper examines the linkages between the two emerging stock exchanges in mainland China and the established markets in Hong Kong and in the US by a multivariate GARCH approach. We use a four-variable asymmetric GARCH in the line of the BEKK model proposed by Engle and Kroner (1995) to account for the regularities documented in the share price indices and test for the transmission of returns and volatility across the markets. While we do not find any evidence of a direct linkage between the stock exchanges in mainland China and the US market, we find evidence of uni-directional volatility spillovers from the stock exchange in Hong Kong to those in Shanghai and Shenzhen. However, the magnitude of the volatility linkages between the mainland and Hong Kong is small, indicating a weak integration of the Chinese stock exchanges with the regional developed market. The implication of the weak integration is that overseas investors will benefit from the reduction of diversifiable risk, and thus total portfolio risk, by adding the mainland Chinese stocks to their investment portfolio.

Financial market interdependencies: A quantile regression analysis of volatility spillover

“…Through the application of this approach for the first time to study financial markets interdependencies in terms of volatility, we confirm the results of previous studies which used different methodologies in order to judge the existence of unidirectional and sometimes bidirectional volatility spillovers between financial markets (Gilenko and Fedorova, 2014;Bekiros, 2014;Li, 2007;Darrat and Kasch-Haroutounian et Price, 2001;Rigobon, 2001, 2002;etc…). Our findings support the robustness of this methodology to detect interdependencies between volatility series which represent a non linear history over time.…”

“…Li (2007) examines the volatility relationships eventually existing between two emerging stock markets (mainland China and Hong Kong) and the US market using a multivariate GARCH model identical to the BEKK approach developed by Engle and Kroner (1995) in order to take into account the regularities which characterize stock indices. Results show evidence of unidirectional transmission of volatility from Hong Kong stock market to those of Shanghai and Shenzhen.…”

“…This methodology made success to capture interdependencies and spillover mechanisms either in bivariate or in multivariate system. It is worth mentioning that the majority of previous studies have led to the existence of unidirectional and sometimes bidirectional spillovers between international stock markets more amplified in times of financial crises and variant depending on the degree of integration (Gilenko and Fedorova, 2014;Bekiros, 2014;Arouri et al, 2011;Li, 2007;Choudhry, 2004;Darrat and Benkato, 2003;Xu and Fung, 2002;Caporale et al, 2002;Kasch-Haroutounian and Price, 2001;Rigobon, 2001, 2002).…”

Sources of time varying return comovements during different economic regimes: evidence from the emerging Indian equity market

“…Specifically, (1) jumps in the returns can generate large comovements, but their impact may be temporary, (2) the diffusive stochastic volatility process may be persistent thus violating the assumption of normally distributed increments as per the Brownian motion and (3) often instead of jumps, smooth diffusion processes with clusters are observed. Li (2007) examines the volatility linkages between Chinese stock exchanges and the US stock market using a multivariate GARCH framework. Similarly, using GARCH framework Cheng and Glascock (2005) examine the stock market linkages between Mainland China, Hong Kong, and Taiwan and two developed markets, Japan and the United States.…”

Surprise Effect of Euro Area Macroeconomic Announcements on CIVETS Stock Markets

“…Hamao et al, 1990;Theodossiou and Lee, 1993;Lin et al, 1994;Susmel and Engle, 1994;Karolyi, 1995) and the emerging markets (e.g. Kasch-Haroutounian and Price, 2001;Sola et al, 2002;Li, 2007). Some studies explore integration in terms of volatility and return linkages (Li and Majerowska, 2008;Fedorova and Vaihekoski, 2009;Scheicher, 2001), while other studies consider the integration phenomenon between different financial markets (e.g.…”