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Financial Crisis, Monetary Policy, and Stock Market Volatility in China

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Author Info

  • Cheng-si Zhang

    (School of Finance, China Financial Research Center, Renmin University of China)

  • Da-yin Zhang

    (School of Finance, Renmin University of China)

  • Jeffery Breece

    (Colby College, USA)

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    Abstract

    This paper employs the Markov regime switching GARCH model to capture the nature of China's stock market volatility in 2003-2009. We find a significant regime shift in the volatility of the stock market when the People's Bank of China adopted an accommodative monetary policy in response to the global financial crisis of 2007-2008. After the structural change, China's stock market moved into a regime with increased volatility, which appears to be persisting into the near future. This finding suggests that the central bank of China should incorporate stock market volatility into its policy-making process.

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    Bibliographic Info

    Article provided by Society for AEF in its journal Annals of Economics and Finance.

    Volume (Year): 12 (2011)
    Issue (Month): 2 (November)
    Pages: 371-388

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    Handle: RePEc:cuf:journl:y:2011:v:12:i:2:p:371-388

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    Related research

    Keywords: GARCH; Stock market; Monetary policy; Regime switching;

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    References

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    1. Christiano, Lawrence & Ilut, Cosmin & Motto, Roberto & Rostagno, Massimo, 2008. "Monetary policy and stock market boom-bust cycles," Working Paper Series 0955, European Central Bank.
    2. Jianping Mei & Jose A. Scheinkman & Wei Xiong, 2009. "Speculative Trading and Stock Prices: Evidence from Chinese A-B Share Premia," Annals of Economics and Finance, Society for AEF, vol. 10(2), pages 225-255, November.
    3. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    4. Ang, Andrew & Bekaert, Geert, 2002. "Regime Switches in Interest Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 163-82, April.
    5. Mech, Timothy S., 1993. "Portfolio return autocorrelation," Journal of Financial Economics, Elsevier, vol. 34(3), pages 307-344, December.
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    7. Arturo Estrella & Jeffrey C. Fuhrer, 2003. "Monetary Policy Shifts and the Stability of Monetary Policy Models," The Review of Economics and Statistics, MIT Press, vol. 85(1), pages 94-104, February.
    8. Burdekin, Richard C.K. & Siklos, Pierre L., 2008. "What has driven Chinese monetary policy since 1990? Investigating the People's bank's policy rule," Journal of International Money and Finance, Elsevier, vol. 27(5), pages 847-859, September.
    9. Roberts, John M, 2006. "Monetary Policy and Inflation Dynamics," MPRA Paper 812, University Library of Munich, Germany.
    10. Schwert, G William, 1989. " Why Does Stock Market Volatility Change over Time?," Journal of Finance, American Finance Association, vol. 44(5), pages 1115-53, December.
    11. Michael Geiger, 2008. "Instruments Of Monetary Policy In China And Their Effectiveness: 1994–2006," UNCTAD Discussion Papers 187, United Nations Conference on Trade and Development.
    12. Simon Gilchrist & Masashi Saito, 2008. "Expectations, Asset Prices, and Monetary Policy: The Role of Learning," NBER Chapters, in: Asset Prices and Monetary Policy, pages 45-102 National Bureau of Economic Research, Inc.
    13. Ben Bernanke & Mark Gertler, 1999. "Monetary policy and asset price volatility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 77-128.
    14. Conrad, Jennifer & Kaul, Gautam, 1988. "Time-Variation in Expected Returns," The Journal of Business, University of Chicago Press, vol. 61(4), pages 409-25, October.
    15. Chengsi Zhang, 2010. "Inflation Uncertainty and Monetary Policy in China," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 18(3), pages 40-55.
    16. Hamilton, James D. & Susmel, Raul, 1994. "Autoregressive conditional heteroskedasticity and changes in regime," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 307-333.
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    Cited by:
    1. Wei Ma & Chuangyin Dang, 2013. "The Optimal Price of Default," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 145-167, May.

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