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An empirical analysis of the volatility spillover effect between primary stock markets abroad and China

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  • Jian Ke
  • Liming Wang
  • Louis Murray

Abstract

This paper tests the volatility spillovers between the Shanghai market and the main developed stock markets abroad, namely New York, Tokyo, London, and Frankfurt, as well as between the Shanghai market and the emerging stock markets, namely Hong Kong, and Korea. The tests cover the period of 11 July 2005-12 July 2007 and 1 August 2007-10 July 2009, since the financial crisis started from July 2007. To account for asymmetries in the volatility transmission mechanism, we have used the GARCH and EGARCH model. The main findings are as follows. First, the degree of the Leverage Effect of the Shanghai market changes in the opposite direction from most of the other sample markets after the financial crisis began in July 2007. This change implies that investors in the Shanghai markets began to pay close attention to bad news. Secondly, reciprocal spillovers exist for some market pairs before the crisis, as the Shanghai A-share market has unidirectional influence on the emerging markets. After the onset of the financial crisis, the stock markets in developed countries have bidirectional influences on each other. The financial crisis brings the developed markets closer together than before, but they do not receive volatility spillover from the Shanghai A-share market. The financial crisis also influences the Asian emerging markets so as to decrease the volatility transmission that comes from the Shanghai A-share market. The Chinese mainland market is still not a vital security market in the world, although it has become the third largest one. Thirdly, the risk-precautionary role of the Shanghai B-share market is not as significant as expected.

Suggested Citation

  • Jian Ke & Liming Wang & Louis Murray, 2010. "An empirical analysis of the volatility spillover effect between primary stock markets abroad and China," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 8(3), pages 315-333.
    • Handle: RePEc:taf:jocebs:v:8:y:2010:i:3:p:315-333
    DOI: 10.1080/14765284.2010.493645
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    Citations

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    Cited by:

    1. Andy Wui Wing Cheng & Iris Wing Han Yip, 2017. "China’s Macroeconomic Fundamentals on Stock Market Volatility: Evidence from Shanghai and Hong Kong," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 20(02), pages 1-57, June.
    2. Konstantinos N. Konstantakis & Panayotis G. Michaelides & Livia Chatzieleftheriou & Arsenios‐Georgios N. Prelorentzos, 2022. "Crisis and the Chinese miracle: A network—GVAR model," Bulletin of Economic Research, Wiley Blackwell, vol. 74(3), pages 900-921, July.
    3. Chong, Oiping & Bany- Ariffin, A.N. & Matemilola, Bolaji Tunde & McGowan, C.B., 2020. "Can China’s cross-sectional dispersion of stock returns influence the herding behaviour of traders in other local markets and China’s trading partners?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 65(C).
    4. Roni Bhowmik & Wang Shouyang & Abbas Ghulam, 2018. "Return and Volatility Spillovers Effects: Study of Asian Emerging Stock Markets," Journal of Systems Science and Information, De Gruyter, vol. 6(2), pages 97-119, April.
    5. Li, Zhinan & Pei, Shan & Li, Ting & Wang, Yu, 2023. "Risk spillover network in the supply chain system during the COVID-19 crisis: Evidence from China," Economic Modelling, Elsevier, vol. 126(C).
    6. Sanjay Sehgal & Mala Dutt, 2018. "Domestic and International Information Linkages for the US Dollar/Indian Rupee Contracts: An Empirical Study," Management and Labour Studies, XLRI Jamshedpur, School of Business Management & Human Resources, vol. 43(4), pages 205-233, November.
    7. Erick Lusekelo Mwambuli & Zhang Xianzhi & Zakayo S. Kisava, 2016. "Volatility Spillover Effects Between Stock Prices and Exchange Rates in Emerging Economies: Evidence from Turkey," Business and Economic Research, Macrothink Institute, vol. 6(2), pages 343-359, December.
    8. Do, A. & Powell, R. & Yong, J. & Singh, A., 2020. "Time-varying asymmetric volatility spillover between global markets and China’s A, B and H-shares using EGARCH and DCC-EGARCH models," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).

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