Volatility Spillover Between Return On Stock Market And Interest Rate In China: A Multivariate Approach

This paper studies the relationship between the second moments of the return onfinancial assets. It helps to analyze the relationship between the financial markets’volatility and their ability to absorb information, which can optimize the assetallocation for the investors, and help the authorities formulate reasonable policies toreduce the impact of the financial risk. Using BEKK method, the volatility spilloverbetween the returns of the stock market in China and interbank interest rate within7days is discussed. In the meantime, the time-varying conditional variance, covarianceand correlation coefficient are put into consideration.First of all, the summary statistics of the first and second moments of thevariable are explored. Whether the mean equations utilize the VAR filter depends onthe tests on autocorrelation and correlation between the current and lagged variables.After that, the estimated coefficients of the mean equations and the variance equationsare of great importance to our discussion. Lagrange Multiplier test is used to decidewhether the volatility spillover between return of the stock market in China (theShanghai Composite Index or Shenzhen Component Index) and interbank interest ratewithin7days exists. It is found that unidirectional volatility spillover between returnof the stock market and interbank interest rate within7days is significantly differentfrom zero. Finally, the conditional variance, covariance and correlation coefficientevolve across the sample period. The result shows that the conditional correlationcoefficient between the Shanghai Composite Index and interbank interest rate within7days fluctuates fiercely. The transformation of the signs for many times, however,has important implications that the conditional correlation coefficient is unstable. Onthe contrary, the conditional correlation coefficient between the Shenzhen ComponentIndex and interbank interest rate within7days varies from minus0.5to minus0.1,and shows its characteristics of time-varying.Last but not least, the relationship between the second moments of the return onstock market in China and the interest rate is mainly discussed. Based on clustering effect on the volatility of the stock market and the time-varying characteristics, andthe mental factors of the investors, some suggestions are put forward.