A Study On Volatility Transmission Between European And China’s Stock Markets

Since the1990s, expansion of the scale of international capital flows has injected a great impetus for the prosperity of global financial markets. As the economic relationship between various countries gets closer, the major international stock markets often share the same fluctuation trend. The excessive volatility in capital flows increases the uncertainties and risks in financial activities and brings the national financial systems profound external shocks. As China’s financial system improves and the degree of economic openness gradual increases, domestic stock market has become more closely linked to world stock markets. Analyzing the transmission mechanism between stock markets from the perspective of international capital flows is an important entry point, as it is not only of great practical significance to investors, but also of policy implication for the government authorities to avoid the international stock market fluctuations.Euro zone, which has a stable economic foundation, is China’s biggest export partner and has a favorable collaborative relationship with China. The stock markets of most emerging-market countries like China showed obvious signs of shrink as the European debt crisis expanded. Based on this background, the thesis is dedicated to empirical studies of the pass-through impact of short-term international capital flows by linking the major Euro and China’s stock market. The thesis generates the stock price sequence through verifying the ARCH effects which exist among China, Germany and France’s stock market fluctuations, uses Granger casualty test to verify that the short-term international capital flow, as a channel, can transmit the European volatility to Chinese market. Then it uses the monthly data from June1994to December2012to set up the TARCH model, and does quantity analysis on the impact of short-term international capital flows, the transparency degree of capital and financial account, the stock market yield spread and the European countries stock price volatility on China’s stock index. The empirical results suggest that the stock market yield spread is the main factor. Meanwhile other factors have impact to a certain degree.Based on these empirical results, the paper points out such suggestions as we need to strengthen supervision on foreign exchange reserves, prevent the impact of short-term international capital flow and press ahead with the reform of the stock market. On the one hand, we need to strengthen the guidance and management on cross-border capital flow and improve the foreign exchange reserve management system; one the other hand, we need to press ahead with China’s stock market reform to increase the liquidity of the stock market and to actively participate in the supervision cooperation with foreign security markets to promote the healthy and stable development of China’s stock market.