Return and Volatility Spillover across stock markets of China and its Major Trading Partners: Evidence from Shanghai Stock Exchange Crash

Abstract

This study analyses the return and volatility spillover effects of Shanghai Stock Exchange (SSE) crash to its Major Trading Partners (MTPs) – U.S.A. (S&P 500), Germany (DAX), Japan (Nikkei 225), South Korea (KOSPI), and Hong Kong (HSI) - using Diebold and Yilmaz (2012) spillover index model. The findings indicate the presence of increased return and volatility spillover between SSE and stock exchanges of MTPs during the sample period. The return spillover transmission is found to be higher than the volatility spillover transmission. Results also highlighted low level of return and volatility spillover from SSE to the stock markets of U.S.A. and Germany. Evidence of high integration between SSE and HSI are also indicated, which promote the geographical proximity impact on financial markets integration. The low return and volatility spillover between SSE and the stock markets of U.S.A. and Germany provide useful portfolio diversification benefits for international investors. The findings of this study provide useful information to potential investors for making rational decisions regarding portfolio diversification in the periods of crisis.