Dynamic Relatedness Analysis of Three Stock Market Return Volatility with a Factor of U.S. stock market:Empirical Study of Hong Kong, Japan, and Singapore Countries

Abstract

This paper studies the associations among and the model construction of Hong Kong, Japan, and Singapore’s stock markets. In this paper we construct a dynamic conditional correlation (DCC) and a trivariate IGARCH (1, 1) model to evaluate the associations, and find that there does not exist an asymmetrical effect among the three stock markets with a factor of U.S. stock market. The result of empirical correlation analyses also shows that Japan’s stock market returns positively affect the Hong Kong and Singapore stock market returns, and the volatility of the three stock market returns interact with one another. Furthermore, the time lags of Hong Kong stock market returns do not affect the returns of the Japanese and Singapore stock markets. The variation risk of the Japan stock market returns’ volatility affects the variation risks of Hong Kong and Singapore stock market returns. Empirical results also show that both good and bad news will actually affect the variation risks of stock market returns. Therefore, based on the viewpoint of DCC, the explanatory ability of the trivariate IGARCH(1, 1) model is better than the model of the trivariate GARCH with a constant conditional correlation. The evidence suggests that stock market investors or international fund managers must evaluate the variation risk and relationships of the stock market returns’ volatility.