Astudy On The Cross-correlation Among The Security Markets Of China, Hong Kong Andamerica

As an important issue in empirical finance, why stock returns displayautocorrelation has been widely concerned. Cutler et al.(1990) pioneered a newperspective on the stock returns’ autocorrelation which focused on the relationshipbetween feedback trading strategy and stock market autocorrelation. After the financialcrisis in2007, the global economy has been affected more or less. Therefore, toinvestigate the impact of the financial crisis on China’s stock market and the impact oninvestor behavior characteristic has important implication in practice.In this paper, we use the returns of three stock market indices (China, America andHong Kong) as the research objectives, to examine the autocorrelation of every market,the cross-correlation and the positive feedback trading among the three markets. Wegenerate the conditional volatility of the market returns, the conditional autocorrelationbetween current and lag-one market returns, the conditional cross-correlation of each twomarket returns and corresponding conditional volatility using GARCH-M model, toanalyze the characteristics of the volatility spillovers and the feedback trading of thethree stock markets. Furthermore, in order to investigate the impact of financial crisis in2007on Chinaese stock traders’ behavior, we divide the data into two groups: before andafter the financial crisis in2007, and examine the correlation and feedback tradingrespectively. Our results suggest that:(1) The volatility of the China’s stock market is larger than that of America andHong Kong. All of the three market indices exist significant ARCH effect, therefore wecan describe the time variability and clustering of return volatility by ARCH model.(2)The characteristics of autocorrelation and cross-correlation among the stockmarket of China, America and Hong Kong are described by the bivariate GARCH-Mmodel in a comparatively good fashion. Comparatively speaking, the American markethas a stronger co-movement with the market of Hong Kong while the mainland market correlates with the Hong Kong market to certain degree and is also influenced by theAmerican market to certain extent.(3)There are not only the characteristic of the "smile" between the volatility andautocorrelation, but also the characteristic of asymmetry. The financial crisis in2007hassignificant effects on the feedback trading of the China, America and Hong Kong.