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How do policy and information shocks impact co-movements of China's T-bond and stock markets?

Listed author(s):
  • Li, Xiao-Ming
  • Zou, Li-Ping

We investigate the impacts of policy and information shocks on the correlation of China's T-bond and stock returns, using originally the asymmetric dynamic conditional correlation (DCC) model that allows for the coexistence of opposite-signed asymmetries. The co-movements of China's capital markets react to large macroeconomic policy shocks as evidenced by structural breaks in the correlation following the drastic 2004 macroeconomic austerity. We show that the T-bond market and the bond-stock correlations bear more of the brunt of the macroeconomic contractions. We also find that the bond-stock correlations respond more strongly to joint negative than joint positive shocks, implying that investors tend to move both the T-bond and stock prices in the same direction when the two asset classes have been hit concurrently by bad news, but tend to shift funds from one asset class to the other when hit concurrently by good news. However, the stock-stock correlation is found to increase for joint positive shocks, indicating that investors tend to herd more for joint bullish than joint bearish stock markets in Shanghai and Shenzhen.

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File URL: http://www.sciencedirect.com/science/article/pii/S0378-4266(07)00214-2
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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 32 (2008)
Issue (Month): 3 (March)
Pages: 347-359

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Handle: RePEc:eee:jbfina:v:32:y:2008:i:3:p:347-359
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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  1. Kim, Suk Joong & Moshirian, Fariborz & Wu, Eliza, 2005. "Dynamic stock market integration driven by the European Monetary Union: An empirical analysis," Journal of Banking & Finance, Elsevier, vol. 29(10), pages 2475-2502, October.
  2. Lorenzo Cappiello & Robert F. Engle & Kevin Sheppard, 2006. "Asymmetric Dynamics in the Correlations of Global Equity and Bond Returns," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 4(4), pages 537-572.
  3. Kim, Suk-Joong & Moshirian, Fariborz & Wu, Eliza, 2006. "Evolution of international stock and bond market integration: Influence of the European Monetary Union," Journal of Banking & Finance, Elsevier, vol. 30(5), pages 1507-1534, May.
  4. Scruggs, John T. & Glabadanidis, Paskalis, 2003. "Risk Premia and the Dynamic Covariance between Stock and Bond Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(02), pages 295-316, June.
  5. Tarun Chordia & Asani Sarkar & Avanidhar Subrahmanyam, 2003. "An empirical analysis of stock and bond market liquidity," Staff Reports 164, Federal Reserve Bank of New York.
  6. Robert-Paul Berben & W. Jos Jansen, 2005. "Bond Market and Stock Market Integration in Europe," DNB Working Papers 060, Netherlands Central Bank, Research Department.
  7. Tarun Chordia, 2005. "An Empirical Analysis of Stock and Bond Market Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 85-129.
  8. Xiao-Ming Li, 2003. "China: Further Evidence on the Evolution of Stock Markets in Transition Economies," Scottish Journal of Political Economy, Scottish Economic Society, vol. 50(3), pages 341-358, 08.
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