The Effect Of Financial Openness On The Return Volatility Of Chinese Stock Market

As a necessary way to contact one country’s financial market with the international financialmarket, financial liberalization has been coupled with the inclusive agreement and practice ofvarious countries in the world. A country’s domestic economy will have the extra impact andinfluence with frequent capital liquidity, especially its stock market. Financial openness meansthat it not only withstands the impact of domestic economic factors, but also to withstand avariety of challenges from international capital market.In this paper, a lot of theoretical and empirical analyses are made in order to study theimplementation of China’s financial opening-up policy for the Chinese stock market. We use thedata of Shanghai Composite Index and Shenzhen Component Index from1992to2012as theresearch objective and introduce the financial openness as a dummy variable into the GARCH(1,1) model to analyze the data. The conclusion indicates that in the short term there is a closelink between these two Index volatility and financial openness. China’s financial openness hassignificant binding effect on stock market return volatility. The article also used VAR model toanalyze the Shanghai and Shenzhen300industry index from August,2007to October,2012, theresult showed that the capital market openness, stock market openness and currency marketopenness had different impact in different industries for index returns.On the basis of this conclusion, the author gives some policy recommendations from thestock market, financial liberalization and market admittance level to remain the stable of thestock market.