Empirical Analysis Of Volatility Spillover Effects Between Domestic And Foreign Stock Markets: Against The Background Of Sub-prime Mortgage Crisis

With the development of financial integration and financial liberalization, the connection between various capital markets become more and more close. The volatility of one market is not only affected by their previous periods, but also influenced by the other markets, that is to say, there exist spillover effect, including mean and volatility spillover effect. And spillover effect has been focused on by academia. The U.S sub-prime mortgage crisis which broke out in 2007, evolving to a global financial crisis, made a profound and lasting influence for the world financial market. The stock markets were going down badly, especially in China, whose stock price index has dropped by 70%. The reasons why sub-prime mortgage crisis evolved to a global crisis and made a far-reaching impact on the global economy need a comprehensive and thorough research. It follow therefore that a comprehensive and complete research focused on interdependence have a significant function and meaning for the stability of the financial system and continuous growth of economy.This paper divide the time into two stages:the time before the outbreak of Sub-prime Mortgage crisis (May 29,2005 to July 31,2007) and the time after outbreak of crisis (July 31,2007 to August 31,2010). This paper comparative analysis the interdependence of the first moment and volatility spillover between the equity markets in Shanghai, Hong Kong, U.S.A and Japan Using Vector Autoregression (VAR), univariate GARCH model and VAR-MGARCH-BEKK model, finding that:Firstly, the four return series are stationary, linear dependences, and do not follow a normal distribution from beginning to end. In addition, there are volatility clustering and persistence in the return series, the null hypothesis of no ARCH is clearly rejected at the 5% significance level.Secondly, this paper utilize vector autoregression (VAR) to survey first moment interdependence between four stock markets. Before the outbreak of Sub-prime Mortgage crisis, there don't exist mean spillover effect between any equity markets. However, there exist mean spillovers from other market to the U.S.A markets but no mean spillover effects in other directions are found for the time after the outbreak of crisis.Thirdly, this paper use univariate GARCH model to explore volatility spillover effects, finding that there only exist direct spillover from Hong Kong markets to Shanghai markets, moreover, the USA market and Japan market can indirect influence Shanghai markets through Hong Kong markets before the financial crisis. However, the volatility spillover effect from U.S.A to Shanghai, Hong Kong to Shanghai is observed after the outbreak of sub-prime mortgage, but spillover effects from Japan to Shanghai isn't found.Finally, this paper use multivariate GARCH model to research volatility spillover effects, the results show that there exist spillover between Hong Kong markets and Shanghai markets, moreover, the USA market can indirect influence Shanghai markets through Hong Kong markets before the financial crisis. However, after the breakout of financial crisis, there exists direct spillover from Hong Kong to Shanghai, and Japan,U.S.A markets can indirect influence Shanghai markets. After the financial crisis, the power of Shanghai market has declined, however, the relationship between other countries has strengthened.After that, this paper use time-varying dynamic conditional correlations to analysis the interdependence between four stock markets. The correlation between Shanghai markets and other markets are rather low before the financial crisis, even the closest is 0.28 for Hong Kong markets. However, the correlations across country has been strengthened after the outbreak of financial crisis, the correlations between Shanghai and Hong Kong, U.S.A, Japan increased to 0.55,0.3 and 0.35 respectively.According to the results, the paper conclude that the government should be more forward looking and comprehensive in economic policy-making and adopt a reasonable and effective supervisory framework to supervise the participants.