Study on the Extreme Risk Spillover between China and World Stock Market after China’s Share Structure Reform

Liangyu Wang

doi:10.4236/jfrm.2014.32006

Abstract

With the rising importance of China’s role in the world economy, the Chinese economic fluctuation has become a more and more significant factor that influences the world economy. Therefore, it is an interesting issue for all circles as well as academicians that whether the real economic inter-connection leads to volatility spillover between China’s and international stock markets. In this paper, CGARCH (Combine Generalized Auto Regressive Conditional Heteroskedasticity) model and Granger causality test are applied to examine the relationship between China’s A share index and world’s major indices with respect to the extreme risk spillover effect. The results show that the extreme risk of A share market’s long-run volatility component has strong risk spillover effect on foreign markets, while the short term volatility is vulnerable to the risks from overseas. Since long-run volatility component is consistent with real economic cycle, our results support that China’s economy has deep impact on world economy.

Highlights

With a history of 21years, Chinese stock market has developed rapidly
This paper analyzed the interconnection between Shanghai index and main international stock indices with the CGARCH Model and Granger Causality Test
The results show that, the influence of China’s stock market on international stock markets is different from short run and long run perspectives

Summary

Introduction

With a history of 21years, Chinese stock market has developed rapidly. In particular, a series of creative reform measures have been adopted by China Security Regulatory Commission in recent years. Study on the Extreme Risk Spillover between China and World Stock Market after China’s Share Structure Reform. This paper analyzes the relationship between Chinese and world stock markets with respect to the extreme risk spillover effect. Having analyzed the data from January 2nd, 1995 to April 4th, 2003, Hong and others (Hong, Cheng, Liu, & Wang, 2004) concluded that Chinese stock market had some slipover risk with other Asian markets while had few or no slipover risk with global developed securities markets. Such empirical studies varied in sampling, making different conclusions. Granger causality test is applied to examine the relationship between China’s and international stock markets with respect to the extreme risk spillover effect, namely the influence of one market’s extreme risk on another market’s volatility

Data and Model

Empirical Results and Analysis

Conclusion