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Empirical analysis of dynamic correlations of stock returns: evidence from Chinese A-share and B-share markets

  • Thomas Chiang
  • Lin Tan
  • Huimin Li

This paper examines the dynamic correlation structure between A-share and B-share stock returns based on three different measures of correlation coefficients. Testing the models by employing daily stock-return data for the period from 1996 through 2003, we reach the following empirical conclusions. First, the correlation coefficients between A-share and B-share stock returns are time varying. Second, the dynamic path of the correlation coefficients indicates that the correlation coefficients are significantly correlated with the trend factor. Third, there is a substantial spillover effect from the Asian crisis to Chinese stock-return dynamic correlations. Fourth, the evidence suggests that the time-varying correlations are significantly associated with excessive trading activity as measured by excessive trading volumes and high-low price differentials. Fifth, the correlation between A-share and B-share markets has increased since the relaxation of the restriction on B-share market investments by domestic investors.

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Article provided by Taylor & Francis Journals in its journal Quantitative Finance.

Volume (Year): 7 (2007)
Issue (Month): 6 ()
Pages: 651-667

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Handle: RePEc:taf:quantf:v:7:y:2007:i:6:p:651-667
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