Financial Contagion In Chinese Stock Market Based On Herd Behavior

Since the 21st century, financial crises broke out in the financial markets around the world constantly. The outbreak of the subprime mortgage crisis not only makes the American financial system teetering, but also spreads to the global financial market. The subprime mortgage crisis evolved into the global financial crisis gradually. The European debt crisis led to a sharp rise in the risk aversion all over the world. The global financial markets suffered varying degrees of impact, and some investors worried that Greece would quit the eurozone. Affected by the financial globalization and financial liberalization, the financial crises are more likely to show characteristics of contagion, and correlation between the financial markets significantly increase will lead to financial crisis spreading faster and widely. Before 2003, the A-share market was not yet an open market, and it was not affected by the south-east Asian financial crisis. Along with putting the Qualified Foreign Institutional Investors (Qualified Foreign Institutional Investors, QFII), the Qualified Domestic Institutional Investors (Qualified Domestic Institutional Investor, QDII) and the RMB Qualified Foreign Institutional Investors (RMB Qualified Foreign Institutional Investors, RQFII) into practice, the linkage between the A-share market and the international stock markets has increased. By contrast, the Hong Kong stock market is a completely open and mature market, which is one of the most important financial center in the Asia-Pacific region, and it is more vulnerable to the impact of the international financial markets. The Hong Kong stock market has been hit from the international speculators twice from 1997 to 1998, however, Hong Kong Special Administrative Region government rescued the market timely and succeeded in curbing the spread of financial crisis.This paper uses the CCK model and CCK model which considering the influences of external to study herd behavior on the A-share market and the Hong Kong stock market during the entire sample period and the crisis period, and selects the appropriate dynamic conditional correlation model to research the conditional correlation among the U.S. stock market, the eurozone stock market, the A-share market and the Hong Kong stock market. In order to analyze the contagion characteristics of the A-share market and the Hong Kong stock market during the subprime mortgage crisis and the European debt crisis, this paper uses the endogenous multiple structural break method to test the structural break points of the conditional correlation, then uses independent sample T-test method to divide the crises’ contagion period and the stable period. Finally, this paper introduces cross-sectional absolute deviation index of individual stock yields (CSAD) to study the herd behavior channel during two crises.In terms of the financial contagion, this paper concludes that the spread of two crises’ contagion to the Hong Kong stock market faster than the A-share market, the contagion period of the Hong Kong stock market lasted longer than the A-share market, but the contagion extent of the Hong Kong stock market weaker than the A-share market. Results also provide that contagion effect of the subprime crisis is stronger than the European debt crisis. In terms of herd behavior, the degree of herd behavior on the A-share market is stronger than the Hong Kong market during the two crises. In terms of the contagion channel, this paper confirms that herd behavior channel is one of the contagion channel to the A-share market and the Hong Kong stock market during two crises. The above research can give the investment strategy to investors, provide risk control measures to risk management, and offer some reference to policymakers’ decisions. At the same time, it is of great significance to maintain the stability of the financial markets.