The Volatility Dynamics of the Greater China Stock Markets

Abstract

AbstractThis paper examines whether the stock markets of Greater China (i.e., those in Hong Kong, Taiwan, Singapore, Malaysia, and Indonesia) have factors in common with stock markets in Mainland China. We use the Dynamic Linear Latent Factor Model to verify the common existence of heteroscedasticity and systematic jump risk in the Greater China stock markets. Using data from a sample of Greater China stock markets from 2001 to 2012, this paper finds that the Greater China stock markets have both GARCH effects and the systematic jump risk in common. Jump risk occurs every 0.86 trading day in the Greater China stock markets. Approximately 26% of the common factors of the Greater China stock market can be explained by the risk of the Mainland China stock market. More specifically, the common factors of the Greater China stock markets are related more closely to the A‐share market than the B‐share market. Finally, a substantial number of the common factors of the Greater China stock markets can be explained by the risk of the U.S. stock market. The effect of the U.S. stock market is dominant over that of Mainland China during the sample period, but Mainland China has been a significant factor since March 2007.