Study On Co-movement Between Shanghai And World Stock Markets

Against the background of financial openness, globalization and the rapid speedof information dissemination, the increasing integration of the global securitiesmarkets is evident, which gives rise to much research interest. Meanwhile, China wasreadmitted to WTO and carried out stock market reforms in efforts to integrate intothe global economy. Are these changes reflected in co-movements between theShanghai stock market and global stock markets? Can domestic institutional investorsbenefit from global diversified investments? This paper intends to make an empiricalstudy of those recent developments.Firstly, this paper reviews existing domestic and foreign literatures, and makeclear the paper’s structure and possible innovations. The second part is a theoreticaloverview of factors driving co-movements among stock markets. The third part dealswith the selection of samples and descriptive statistics, laying the foundation forquantitative proof research. Then the paper conducts co-integration, impulse responseand variance decomposition tests to identify the co-movement between the Shanghaistock market and world stock markets. The study finds that a long-term relationshipdoes not exist between the Shanghai stock market and the other stock markets.However, the links had been enhanced since the latter half of2005, and Shanghaistock market began to impact other stock markets. In addition, this paper usesBEKK-GARCH model to study the volatility spillovers between domestic and foreignstock markets dynamically. Consistent with the previous analysis, the findings showthat before June2005, there was no spillover effect in any direction between andamong6stock markets, and that there even appeared two-way volatility spillovers betweenShanghai and American，Germany，Hong Kong stock market in bullish period after June2005.Surprisingly, since October2007, the direction of spillover effects is a one-way streetfrom Shanghai stock market to other markets. This paper ends with furtherinterpreting the empirical results, and policy recommendations for improving thedomestic capital market.