Mean Volatility Spillover and Time-varying Conditional Dependence in Chinese Stock Markets.pdf

Mean, Volatility Spillover and Time-varying Conditional Dependence in Chinese Stock Markets Yi Zheng and Wing-Keung Wong RMI Working Paper No. 07/02 Submitted: January 3, 2007 Abstract This paper adopts a two-stage bivariate GARCH model to analyze the mean and volatility spillovers and time-varying conditional dependence between A and B shares in the China stock market. Impacts of US and Hong Kong on China market are also examined. We find that in the Shanghai exchange where most state-owned big companies are listed, B shares trading is more influential in the information transmission while in the Shenzhen exchange with a smaller and less-liquid market, the direction of the spillover effect reverses. We also find that there exist some time-varying dependence patterns between A and B shares in both Shanghai and Shenzhen exchanges. In addition, there is an upward trend of conditional correlation in both A and B shares after 2002. The evolution of conditional dependence is closely linked to China’s government intervene policies on its stock market. In addition, our findings reveal that Hong Kong, as a neighbor of mainland China’s economy, is more influential than the US on the Shanghai and Shenzhen stock exchanges. Keywords: China stock market, two-stage bivariate GARCH model, spillover effect. Yi Zheng Wing-Keung Wong Department of Economics Risk Management Institute and National University of Singapore Department of Economics AS5 04-07 National University of Singapore Singapore 117570 Block S16, Level 5, 6 S