The Study On Financial Contagion Effect Among China's Stock Markets And Bond Markets

On the background of economic globalization and crisis occurred frequently, it becomes easier and rapider that crisis spreads from original country to other counties. In channels of crisis transmission, financial contagion has already become the main channel. Financial contagion effect is related to safety and stability of economy and finance in a country, in a region, even in the world, so it must be treated seriously.Stock market and bond market are core parts of securities markets, and China's stock market and bond market have made a rapid progress since they were built. With the continuous growth of China's economy and increased importance of China's economy in the world, ties between China's stock(bond) market and international financial markets have grown closer and China's stock(bond) market can be contagious by financial crisis more easily than before. It is of great significance to study the financial contagion effect between China's stock market and bond market for hedging risk, policy-making, deepening reform and opening up of financial system and stabilizing financial markets and economy after financial crisis, especially international financial crisis erupted in 2008 in a new economic and financial environment.The concepts and methods of financial contagion effect are explained in the paper, and financial contagion effects among China's stock markets and bond markets are tested by Granger-causality with dynamic VaR, based on Shanghai stock market, Shenzhen stock market and exchange bond market, inter-bank bond market.First, Contagion mechanism is analysed. Flight to quality is found among China's stock markets and bond markets in the context of financial crisis, and behaviors of investors are not same between exchange bond market and inter-bank bond market because of difference between markets.Second, the dynamic VaRs of China's stock markets and bond markets are tested in a unified framework, and the results show:(1) The risks of markets are measured more precisely by fat-tailed models and skew models than by normal models, then fat-tailed distribution and skew distribution providing more effective information are valuable in risk management. (2) Leverage effect is not the key factor in risk measurement because GJR model describing leverage effect is not necessarily better than GARCH model. So leverage effect not providing more effective information can be ignored in risk measurement in financial market. (3) The best model in a coverage rate is the model which p is the largest in back-testing, because model with larger p is more precise than model with smaller p to describe character of volatility and risk, that is to say, in order to improve performance of risk measurement, the best model should be selected in all models.Third, financial contagion effects among China's stock markets and bond markets are studied with dynamic VaR, and the results show:(1) the relationships of dynamic risk transmission between stock market and exchange(inter-bank) bond market are very different in all sample, while the relationships of dynamic risk transmission between bond market and Shanghai(Shenzhen) stock market are same in all sample. (2) The relationships of dynamic risk transmission between stock(bond) markets are strengthened by financial crisis. (3) The relationships of dynamic risk transmission between stock market and exchange(inter-bank) bond market are different not only before financial crisis but also after financial crisis. (4) There are only risk transmissions from stock markets to bond markets before financial crisis, while there are risk transmissions both from stock markets to bond markets and from bond markets to stock markets after financial crisis. Then, the relationships of dynamic risk transmissions between stock markets and inter-bank bond market are strengthened significantly by financial crisis, and the risk transmissions from bond markets to stock markets become stronger after financial crisis. (5) The relationships of dynamic risk transmission and financial contagion effects between stock markets and inter-bank bond market are very stable. (6) Financial contagion effects, between exchange bond market and inter-bank bond market, from exchange(inter-bank) bond market to Shenzhen stock market, and from inter-bank bond market to Shanghai stock market, are very stable. (7) The difference between exchange bond market and inter-bank bond market, causing different relationship of dynamic risk transmission between exchange(inter-bank) bond market and stock markets, plays an important role in dynamic risk transmission between exchange(inter-bank) bond market and stock markets, while the difference between Shanghai stock market and Shenzhen stock market works in dynamic risk transmission between Shanghai(Shenzhen) stock market and exchange bond market only when the risk is lower and causes the difference of relationship of dynamic risk transmission between Shanghai(Shenzhen) and exchange bond market. The results indicate that the difference between bond markets is huger than between stock markets, and the influence of difference between bond markets is greater than between stock markets. In general, dynamic risk transmission, not only between bond(stock) markets but also between bond markets and stock markets, are weaker before financial crisis, but grow stronger after financial crisis. This indicates that the relationship of dynamic risk transmission between stock markets and bond markets are strengthened significantly by financial crisis and there exists financial contagion effect between markets. The difference between exchange bond market and inter-bank bond market, resulting in the different relationship of dynamic risk transmission between exchange(inter-bank) bond markets and stock markets, indicates that capital and information cannot flow freely between exchange bond market and inter-bank bond market, and the two bond markets are separated in some extent. Robustness analysis shows that dynamic risk transmission and financial contagion effect between stock markets and bond markets are robust. In addition, the way and mechanism of risk transmission between stock markets and bond markets are simply analyzed.Last, the paper summarizes and advises:(1) First, financial contagion effect especially after serious financial crisis should be considered enough in financial regulation for safety and stability of financial system. Second, the spillover effect of risk in bond markets should be considered enough after a shock because bond markets become source of risk to stock markets and other financial markets. If do not consider the spillover effect of risk in bond markets, the risk of market may be underestimated and the supervision may be improper. Third, coordination and correspondence of regulation should be improved. Since the relationships of risk transmission between markets changed after financial crisis, the changes and the differences between markets should be considered seriously to improve policy effect. (2) The separated state of bond markets is not helpful for its development and regulation and makes the function of bond markets used insufficiently, then, further measures should be taken to build a unified and effective bond market which can suit the development of economy and hedge the risk of stock markets and other financial markets, especially the risk of serious crisis. This point is very important for safety and stability of finance and economy. (3) For investor, for financial contagion effect degrades the performance of risk diversification of portfolio, the financial contagion effect should be considered in portfolio selection to diversify risk effectively, especially after serious crisis.