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