Under The Background Of Financial Crisis In The Us And European Stock Market Correlation Research

With the growing trend of world economic integration, the major internationalstock market often shares the same change trend. It is not only of great significance toinvestors, but also of significant policy implication for the government authorities tokeep the market stability and avoid the stock market fluctuations which are due to thelinkage between the national stock market and international stock market. In the past,the linkage of the stock market focused mainly on the developed countries. With therise of emerging countries and their increasingly important economic position in theworld economy, the linkage of emerging countries stock market has receivedincreasing attention in recent years.We first explore the stock market linkage effects home and aboard systematicallyand comprehensively. Then we propose the hypothesis of this article after the study ofrelevant literature, combining with the reality of the theoretical background and theAsian financial crisis, as well as the U.S. financial crisis and debt crisis in Europe.After that we use a variety of methods to study empirically on the linkagebetween the stock market in Hong Kong, Japan, U.S. and European stock markets, toexamine the change of the linkage effects from four different angles, respectively,which are threshold cointegration to examine non-linear correlation, the Grangercausality test to inspect causality, the DCC-GARCH model to study yield volatilityspillover effects, Copula Model to inspect tail correlation. We expect to understandthe linkage between China and the U.S. stock market overall and at different levels.Finally, we study China’s financial market stability caused by Chinese andforeign stock market linkage in the context of the financial crisis. The details are asfollows:First, we conduct the empirical analysis of market rate of return’s linkage withthe Chinese stock market （CSI300） Hong Kong （Hang Seng Index）, Japan（Nikkei index）, Europe （Bloomberg Europe500） and U.S. stocks （S&P500）, using the new econometric methods developed in recent years. It turns out during theAsian financial crisis; China mainland’s stock market and overseas stock market donot have the linkage effects, but the U.S. financial crisis and debt crisis in Europeshow significant linkage effects.Second, we use bivariate DCC-GARCH model to conduct a study on thevolatility of the stock yields with Chinese stock markets （Shanghai and Shenzhen300）Hong Kong（Hang Seng Index）, Japan（Nikkei Index）, Europe（BloombergEurope500） and U.S. stocks （S&P500）. The results shows that: compared withthe Asian financial crisis, the linkage between China mainland’s stock market andoverseas stock markets coefficient present a clear upward trend.Third, we use the Copula Model on the Chinese stock market （CSI300） HongKong （Hang Seng Index）, Japan （Nikkei Index）, Europe （Bloomberg Europe500） and U.S. stocks （S&P500） for the tail dependence empirical study. Theresults show that, the peak correlation coefficient increased significantly comparedwith period during the Asian financial crisis.Finally, this paper conduct an empirical analysis the effect of the U.S. financialcrisis and the European debt crisis on China’s financial stability using financialstability index, based on the previous research result.We find that, although there is a linkage between China mainland’s stock marketand overseas stock markets during the financial crisis, the linkage effects is not largeenough to have enough impact on China’s financial stability. From the time series offinancial stability index, we can draw the conclusion that the series is stationery overtime. From the impulse response, we can see that China’s stock market has strongability to restore the steady state, showing a strong ability to resist risks. Finally, weprovide the policy recommendations according to the theoretical and empirical studyof the paper.These innovations of the paper are mainly as following:First, theoretically, it combines the historical changes of the economic crisis andfinancial crisis conduction theory, which compensates for the shortage of domestic research. We proposes the assumption of the study based on the literature review andinsight into the Chinese mainland, Hong Kong, Japan, the United States and the EUeconomic relations.Second, we propose an empirical framework on the stock market linkage toverify the assumptions of this paper. That is from the three levels of analysis, yield,volatility, and extreme value of the linkage relationship between the stock index havelevel and in-depth understanding, in order to avoid the current study’s defects ofdetermining the stock market linkage only by the relationship between the rate ofreturn or volatility, or by the peak correlation.Third, through the use of the copula function, we can clearly compare thechanges of the correlation coefficient in each time period, so that we can investigatethe short-term knock-on effects of the economic crisis.Fourth, previous studies mostly focused on mainland China and a single foreignstock market, while this paper adopts the Chinese A-share market （CSI300） HongKong （Hang Seng Index）, Japan （Nikkei Index）, Europe （Bloomberg Europe500） and U.S. stocks （S&P500） market on the relationship between China’smainland, Hong Kong, Japan, the United States and Europe.Fifth, we not only studied the linkage but also use DCC-GARCH model’sestimation the effect of the U.S. financial crisis and the European debt crisis onChina’s financial stability.