The Analysis Of Dynamic Correlation Between China And The International Stock Markets

Since 1980s, financial liberalization has become the mainstream of international economic development. With rapid economic development and the deepening of the opening up of China, China has integrated into the world economy. The economic integration between China and global capital market has been accelerating. The interaction between China and the international stock market has been gradually deepened. On the one hand, the correlation improves the efficiency of China's capital markets and promotes the country's economic development. On the other hand, the domestic stock market risk has been greatly increased because the volatility is not only affected by their own economic and policy implications, but also by other countries and capital markets. As core of the capital market, stock market which undertakes the responsibility to optimize social resources of domestic market and to attract international capital is a bridge between domestic and overseas capital flows. How to guard against risks and maintain the stability of the domestic stock market in the context of financial liberalization has practical significance. The empirical study shows that: the shanghai stock market has the greatest linkage with the Hong Kong stock market and the least linkage with the U.S. market. The generalized impulse response function indicates that under different market movements, the impact of volatility on correlation is asymmetric. For international investors, the stock market in China is a good place to spread the risks. For policy makers, they should pay attention to the global markets as well as domestic market, reduce the bad policy to stabilize the domestic stock market when the United States, Japan, Hong Kong and other international stock market is in downturn periods.This article contains five chapters, the overall as follows:The first chapter is the Introduction, we state the background and significance and give out the frame of this paper. Meanwhile, we illustrate the innovation in this paper.In chapter two, we review the literature and do a simple comment.The third chapter is the theoretical basis. We explain the methods we use in this paper like GARCH model, multi-GARCH and VAR model.The fourth chapter is data filtration and basic statistical description. In this paper, we select Shanghai Composite Index, Hang Seng Index, Nikkei 225 Index, Dow Jones Index. Data time period lasts from the January 2, 1997 to April 8, 2010. After removing the non-coincidence date, we do a ADF test.The fifth chapter is empirical analysis which is the focus of this paper. We use Eviews6.0 statistical software. We capture the conditional volatility of stock markets of Shanghai, Hong Kong, Japan and the U.S. by employing TGARCH model. Meanwhile, we investigate the changes of dynamic conditional correlation coefficients between China and other international stock markets using BEEK-GARCH model. From the real economy and the virtual economy we analyze the reasons for changes of the correlation coefficient. Based on the analysis above, we study the impact of volatility on correlation via VAR model. The empirical study shows that: the shanghai stock market has the greatest linkage with the Hong Kong stock market and the least linkage with the U.S. market. The generalized impulse response function indicates that under different market movements, the impact of volatility on correlation is asymmetric. An increase of correlation between China and International market is observed during International stock market downturn periods.Finally the conclusion summarizes the core and the result of whole paper.