The Co-movement Between Stock Index Of China,America And Europe Based On Vein-Copula Model

With the accelerating process of financial globalization, a greatly increase in thelevel of information technology and the rapid development of financial innovation,the main stock markets begin to show a tendency that the stocks rise or fall together.The co-movement in stock market occurred mainly in the development countriesbefore, such as Germany, Japan, Britain and America, but the financial globalizationpromotes new co-movement between emerging stock markets and the internationalstock markets. China which is a leader in the emerging economies, develops rapidlyin financial market, and there is more and more interaction with the developedcountries. Therefore, it is important to study the co-movement between stock marketof China, America and Europe.The theory related to stock market co-movement mainly includes economic basishypothesis, financial contagion hypothesis and behavioral finance theory. The paperexplains the formation mechanism of China, America and Europe stock co-movementfrom degree of market opening, foreign trade, investor expectation and commonshocks, which are the theoretical basis of this paper. In order to analysis morecomprehensively, this paper chooses volatility, returns and tail analysis to explore theinteraction between Chinese, American and European stock index.First of all, this paper chooses the better fitting GARCH (1,1) model in view ofthe volatility of stock index. Chinese Shanghai composite index (SSEC) gets theoptimal model on GED distribution, while The Dow Jones Industrial Average(DJIA)and the STOXX600index (STOXX) get the optimal model on student’s t distribution.the corresponding parameters shows the influence of the early fluctuation to theconditional variance is large in all the three indexes, especially SSEC. Besides, Theimpact on the conditional variance is persistent. It means current volatility willdisappear slowly.Secondly, the paper uses the Copula model and DCC-GARCH model to analyzethe co-movement of return rate. Since Copula function has fine function characteristics, it has been widely used in financial fields. It can meet therequirements of non-linear, non-symmetry, varieties of distribution in co-movementanalysis. The results suggest that there is a weak correlation between SSEC, DJIAand STOXX. However, DJIA and STOXX showed a high correlation. TheDCC-GARCH model has time-varying dynamic characteristics, which reflects thedifferences of co-movement on varying time in the study of multivariable. The resultsshow that there is a correlation between the returns of Stock Index of China, Americaand Europe. It is significant in the continuous effect of continuous dynamiccorrelation, and the results shows the time path of dynamic correlation coefficient.Finally, this paper introduces Vine-Copula model in the analysis tail correlation.Based on the basic principle of Copula and the evolution of Vine-Copula, we selectthe D Vine-Copula model to analysis tail correlation Between Stock Index of China,America and Europe. Three Copula functions including t-Copula, Clayton Copulaand Joe-Clayton Copula shows that there is a strong tail correlation between DJAIand STOXX. However, there is a weak tail correlation not only between SSEC andDJAI but also between SSEC and STOXX in spite that the Clayton Copula modelreflects weak lower tail dependence in the case of non-conditional correlation, thatJoe-Clayton Copula picks up weak tail correlation. In addition, the lower tailcorrelation is bigger than the upper tail correlation in the whole. In addition as awhole, the lower tail correlation between China, the United States and Europe isgreater than the upper tail dependence. It suggests that volatility from a negativeimpact is greater than volatility from a positive impact in stock markets, that is to say,probability of falling sharply is greater than probability of rising.