China Vs Japan Hong Kong India US Taiwan
Pacific-Basin Finance Journal 20 (2012) 247–270
Contents lists available at SciVerse ScienceDirect
Pacific-Basin Finance Journal journal homepage: www.elsevier.com/locate/pacfin
Volatility spillovers between the Chinese and world equity markets
Xiangyi Zhou a,⁎, Weijin Zhang a, Jie Zhang b a b
Jinhe Center for Economic Research, Xi 'an Jiaotong University, PR China
Department of Economics, Texas A&M University, United States
a r t i c l e
i n f o
Article history:
Received 23 February 2011
Accepted 2 August 2011
Available online 16 September 2011
Keywords:
China
World equity markets
Vector autoregression
Variance decomposition
Spillover index
Financial crisis
JEL classification:
G15
F36
a b s t r a c t
We propose measures of the directional volatility spillovers between the Chinese and world equity markets based on Diebold and Yilmaz 's
(2011b) forecast-error variance decompositions in a generalized vector autoregressive framework. It was found that the US market had dominant volatility impacts on other markets during the subprime mortgage crisis. The other markets were also very volatile, and driven by bad news, their massive volatilities were transmitted back to the US market. The volatility of the Chinese market has had a significantly positive impact on other markets since 2005. The volatility interactions among the markets of China, Hong Kong, and
Taiwan were more prominent than those among the Chinese,
Western, and other Asian markets were. The major correction of the
Chinese stock market between February and July 2007 significantly contributed to the volatility surges of other markets. Owing to the restrictions on foreign investment, the Chinese stock market was not considerably affected in terms of market volatility during the subprime mortgage crisis.
© 2011 Elsevier B.V. All rights reserved.
1. Introduction
As globalization and financial liberalization are enabling international financial markets to become more correlated and connected than ever before,
Contents lists available at SciVerse ScienceDirect
Pacific-Basin Finance Journal journal homepage: www.elsevier.com/locate/pacfin
Volatility spillovers between the Chinese and world equity markets
Xiangyi Zhou a,⁎, Weijin Zhang a, Jie Zhang b a b
Jinhe Center for Economic Research, Xi 'an Jiaotong University, PR China
Department of Economics, Texas A&M University, United States
a r t i c l e
i n f o
Article history:
Received 23 February 2011
Accepted 2 August 2011
Available online 16 September 2011
Keywords:
China
World equity markets
Vector autoregression
Variance decomposition
Spillover index
Financial crisis
JEL classification:
G15
F36
a b s t r a c t
We propose measures of the directional volatility spillovers between the Chinese and world equity markets based on Diebold and Yilmaz 's
(2011b) forecast-error variance decompositions in a generalized vector autoregressive framework. It was found that the US market had dominant volatility impacts on other markets during the subprime mortgage crisis. The other markets were also very volatile, and driven by bad news, their massive volatilities were transmitted back to the US market. The volatility of the Chinese market has had a significantly positive impact on other markets since 2005. The volatility interactions among the markets of China, Hong Kong, and
Taiwan were more prominent than those among the Chinese,
Western, and other Asian markets were. The major correction of the
Chinese stock market between February and July 2007 significantly contributed to the volatility surges of other markets. Owing to the restrictions on foreign investment, the Chinese stock market was not considerably affected in terms of market volatility during the subprime mortgage crisis.
© 2011 Elsevier B.V. All rights reserved.
1. Introduction
As globalization and financial liberalization are enabling international financial markets to become more correlated and connected than ever before,
References: Bae, K.H., Karolyi, G.A., 1994. Good news, bad news and international spillover of stock return volatility between Japan and the US. Bailey, W., 1994. Risk and return on China 's new stock markets: some preliminary evidence. Pacific-Basin Finance Journal 2, 243–260. Bekaert, G., Harvey, C., 1995. Time-varying world market integration. Journal of Finance 50 (2), 403–444. Bekaert, G., Harvey, C., 1997. Emerging equity market volatility. Journal of Financial Economics 43 (1), 29–77. Cai, Y., Chou, R.Y., Li, D., 2009. Explaining international stock correlations with CPI fluctuations and market volatility. Journal of Banking and Finance 33 (11), 2026–2035. Chi, J., Li, K., Young, M., 2006. Financial integration in East Asian equity markets. Pacific Economic Review 11 (4), 513–526. Diebold, F.X., Yilmaz, K., 2009. Measuring financial asset return and volatility spillovers, with application to global equity markets. Diebold, F.X., Yilmaz, K., 2011a. Equity Market Spillovers in the Americas. In: Alfaro, R. (Ed.), Financial Stability, Monetary Policy, and Central Banking, vol Diebold, F.X., Yilmaz, K., 2011b. Better to give than to receive: predictive directional measurement of volatility spillovers. International Journal of Forecasting. Eun, C.S., Shim, S., 1989. International transmission of stock market movements. Journal of Financial and Quantitative Analysis 24, 241–255. Forbes, K.J., Rigobon, R., 2002. No contagion, only interdependence: measuring stock market comovements. Journal of Finance 57 (5), 2223–2261 (October). Frank, N., Hesse, H., 2009. Financial spillover to emerging markets during the global financial crisis. IMF Working Paper, WP/09/104. Groenewold, N., Tang, S.H.K., Wu, Y., 2004. The dynamic interrelationships between the greater China share markets. China Economic Review 15 (2004), 45–62. Hamao, Y., Masulis, R.W., Ng, V., 1990. Correlations in price changes and volatility across international stock markets. Review of Financial Studies 3, 281–307. Hu, J.W.-S., Chen, M.-Y., Fok, R.C.W., Huang, B.-N., 1997. Causality in volatility and volatility spillover effects between US, Japan and four equity markets in the South China Growth Triangular Janakiramanan, S., Lamba, A.S., 1998. An empirical examination of linkages between Pacific-basin stock markets. Journal of International Financial Markets, Institutions and Money 8 (2), 155–173. Johansson, A., Ljumgwall, C., 2008. Spillover Effects among the Greater China stock markets. World Development 37 (4), 839–851. King, M., Sentana, E., Wadhwani, S., 1994. Volatility and links between national stock markets. Econometrica 62, 901–933. Koop, G., Pesaran, M.H., Potter, S.M., 1996. Impulse response analysis in non-linear multivariate models. Journal of Econometrics 74, 119–147. Lin, K.-P., Menkveld, A.J., Yang, Z.S., 2009. Chinese and world equity markets: a review of the volatilities and correlations in the first fifteen years Melvin, M., Peiers, B., 2003. The global transmission of volatility in the foreign exchange market. The Review of Economics and Statistics 85 (3), 67–679. Moon, G.H., Yu, W.C., 2010. Volatility Spillovers between the US and the China Stock Markets: Structural Break Test with Symmetric and Asymmetric GARCH Approaches Ng, A., 2000. Volatility spillover effects from Japan and the US to the Pacific-Basin. Journal of International Money and Finance 19, 207–233. Parkinson, M., 1980. The extreme value method for estimating the variance of the rate of return. Journal of Business 53, 61–65. Pesaran, M.H., Shin, Y., 1998. Generalized impulse response analysis in linear multivariate models. Economics Letters 58, 17–29. Soriano, P., Climent, F.J., 2006. Volatility Transmission Models: A Survey. Available at http://papers.ssrn.com/soL3/papers.cfm? abstract_id=929953 2006. Wang, S.S., Firth, M., 2004. Do bears and bulls swim across oceans? Market information transmission between greater China and the rest of the world Wang, Y., Di Iorio, A., 2007. Are the China-related stock markets segmented with both world and regional stock markets? Journal of International Financial Markets, Institutions and Money 17 (3), 277–290. Wongswan, J., 2003. Transmission of information across international equity markets. Federal Reserve-International Finance Discussion Papers, No. 759. Yilmaz, K., 2010. Return and volatility spillovers among the East Asian equity markets. Journal of Asian Economics 21 (3), 304–313. Zheng, Y., Chen, H., Wong, W.-K., 2009. China 's Stock Market Integration with a Leading Power and a Close Neighbor. Available at SSRN: http://ssrn.com/abstract=1547665 2009.