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Regime-dependent causality between Chinese and U.S. equity markets: Evidence from Markov switching models

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  • Valadkhani, Abbas
  • Marashdeh, Hazem

Abstract

This study analyses the dynamic interdependence between Chinese and U.S. equity markets using Markov regime-switching vector autoregressive (MS-VAR) models. We cover monthly data from May 2007 to August 2024 within a single-currency framework on the New York Stock Exchange. Two broad-based Exchange-Traded Funds (ETFs)—SPY for the U.S. and GXC for China—serve as proxies for equity returns. The study identifies two regimes: Regime 1, characterised by periods of crisis, and Regime 2, representing stable market conditions. Causality tests based on the MS-VAR model reveal bidirectional causality between the markets in Regime 2, a relationship not detected by conventional Granger tests. In Regime 1, causality is unidirectional from the U.S. to China, indicating that Chinese investors are more exposed to U.S.-driven shocks during periods of market turbulence. The findings suggest the need for collaborative strategies to reduce market risks, address vulnerabilities, and manage spillovers arising from geopolitical tensions.

Suggested Citation

  • Valadkhani, Abbas & Marashdeh, Hazem, 2026. "Regime-dependent causality between Chinese and U.S. equity markets: Evidence from Markov switching models," Research in International Business and Finance, Elsevier, vol. 83(C).
    • Handle: RePEc:eee:riibaf:v:83:y:2026:i:c:s0275531926000127
    DOI: 10.1016/j.ribaf.2026.103285
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    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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