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Effects of the open policy on the dependence between the Chinese 'A' stock market and other equity markets: An industry sector perspective

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  • Luo, Weiwei
  • Brooks, Robert D.
  • Silvapulle, Param

Abstract

This paper investigates the effect of the open policy introduced in 2002 to allow foreigners to invest in the Chinese 'A' share market on the Chinese domestic capital market, especially on the dependence between the financial index returns of the 'A' shares and those of some emerging markets, specifically Hong Kong, Singapore, Thailand, Korea and Taiwan as well as the developed markets US, Japan and Australia. The results of nonparametric plots and copula model estimates of these dependence structures provide evidence of weak dependence in these markets before the introduction of the open policy, except for the US and Japan, and the tail dependence is found to be insignificant for all country pairs. These dependence structures are adequately captured by Clayton and normal copula models. On the other hand, in the period 2002-2009, there is significant dependence in all but the Korean market, as indicated by Symmetric Joe-Clayton, Clayton and rotated Gumbel copula models. Further, the significant lower tail dependence of the 'A' shares with other markets was found, except for the US, Japan and Korea, which indicates that the financial sectors returns in these five pair markets move downwards together. These findings have implications for international portfolio diversification and financial market participants.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

Volume (Year): 21 (2011)
Issue (Month): 1 (February)
Pages: 49-74

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Handle: RePEc:eee:intfin:v:21:y:2011:i:1:p:49-74

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Web page: http://www.elsevier.com/locate/intfin

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Keywords: Dependence Copula Chi-plot Kendall-plot Semi-parametric estimation;

References

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  1. Lin, Kuan-Pin & Menkveld, Albert J. & Yang, Zhishu, 2009. "Chinese and world equity markets: A review of the volatilities and correlations in the first fifteen years," China Economic Review, Elsevier, vol. 20(1), pages 29-45, March.
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  11. Hwahsin Cheng & John L. Glascock, 2006. "Stock Market Linkages Before and After the Asian Financial Crisis: Evidence from Three Greater China Economic Area Stock Markets and the US," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 9(02), pages 297-315.
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Cited by:
  1. Li, Hong, 2013. "Integration versus segmentation in China's stock market: An analysis of time-varying beta risks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 25(C), pages 88-105.
  2. Li, Hong, 2012. "The impact of China's stock market reforms on its international stock market linkages," The Quarterly Review of Economics and Finance, Elsevier, vol. 52(4), pages 358-368.

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