An Analysis of the International Linkages between China and the US Market: A Multivariate GARCH Approach

Peer reviewed: 
No, item is not peer reviewed.
Scholarly level: 
Graduate student (Masters)
Date created: 
Multi-variate GARCH
Asymmetric response of volatility
Stock market linkages
Return spillovers
Volatility spillovers
Shock spillovers

This paper attempts to re-examine Li (2007)’s study on the interrelationships among the stock exchanges in mainland China, Hong Kong and the U.S. by applying a four-variable BEKK-GARCH model. After extending the data to a longer and more recent period, we find that global economic recession and financial market integration do affect the correlations among international financial markets. The U.S. market, playing a crucial role in the global markets, directly affects the Chinese stock markets, which is supported by the evidence of unidirectional return and shock spillovers from the stock exchange in the U.S. to those in China. We also find a strong integration of mainland Chinese stock exchanges with Hong Kong market, which is indicated by the bidirectional shock spillovers between the stock exchanges in mainland and that in Hong Kong. These findings differ from Li’s conclusions and suggest that international markets have become far more linked than before. Thus, international investors may not benefit as much from the reduction of diversifiable risk by adding mainland Chinese stocks to investment portfolio as before and need to consider more foreign stock market information.


MSc in Finance Project-Simon Fraser University

Document type: 
Graduating extended essay / Research project
Copyright remains with the author.
Senior supervisor: 
Andrey Pavlov
Beedie School of Business-Segal Graduate School