Study On Co-movement Of Sino-American Stock Market

With the deepening of the world economic integration, the linkage between different stock markets is becoming closer and closer. China is speeding up opening its domestic to the whole world for changing its economic structure. On one hand, the cutting-edge technology and advanced management ideology can be introduced to improve the efficiency of Chinese stock market, on the other hand, the Chinese stock market will be exposure to more risk which has never been met before. That will be a great challenge for Chinese stock market. In such a circumstance, the mainly discussed topic in this paper the co-movement between the Chinese stock market and American stock market is meaningful.The author compared Chinese stock market and American stock market from several aspects including mechanism of IPOs in primary market and trading in secondary market, and regulatory framework etc. As a whole, the development of Chinese stock market is more backward than the American stock market. In the primary market, the IPOs system used in America is registration-based system. Under this system, it is the market playing an important role in the process of IPOs rather than the US government. While in China, the IPOs system is approval-based system, which has gave Chinese government greater power than market. In the secondary market, the U.S. Securities and Exchange Commission (SEC) play an important role in supervising the market. And the punishment to insider dealing made by SEC is extremely strict. Although the Chinese Securities Regulatory Commission (CSRC) has also made some laws to restrict market, the punishment and its implementation effect is far less than that of the America. In addition, there is also a great difference in dividend policy between China and America. In America, the majority of listed companies choose to pay cash dividend regularly to convey positive information to market for getting resources of further development and creating a good public image. But in China only a fraction of listed companies pay low amounts of dividend and this payment is often random. In term of market supervision, U.S. SEC always processes the illegal companies with a nature of punishment, which increases the cost of taking illegal acts. For example, the punishment from SEC is the immediate cause to the bankruptcy of Enron Corporation and WorldCom Corporation. After the breakout of subprime crisis, the US government introduced the "Dodd-Frank Act" to further improve supervision system. In one word, the American supervision system of both primary market and secondary market is comprehensive and efficient. Chinese has made some rules to restrict behavior of listed companies, but the actual effect is not ideal. In fact, the profit that companies" get by financial fraud and insider dealing is greater than the loss form punishment by CSRC. And the CSRC pay its attention mainly on the process of IPOs instead of the process from IPOs to trading and so on. That means the Chinese supervision system of market is imperfect. There is also great difference in investor structure between Chinese and American stock market. In China, the stock market is dominated by the individual investors, while in US the institutional investors control the market. In addition, the Chinese stock market has a higher turnover rate than the American stock market. These factors make Chinese stock market is volatile compared to American stock market.After the comparison between Chinese stock market and American stock market. The author introduced the possible transmission channel and related theories abou co-movement of stock markets. Two transmission channel including exchange rate channel and investor expectation channel has been discussed here. The related theories o co-movement of stock markets include ICAPM, IAPT, EMH, BFT and information spil ver effect. Both of the ICAPM and IAPT is originated from "law of one price" which m(?)ns that the same financial asset in different markets should have the same price. These two theories illustrated the mechanism of co-movement of stock markets from the perspective of asset pricing. EMH assumes that the stock prices have reflected all the known information. It is the transmission of information that results the co-movement of stock markets. BFT takes the investors' emotion into consideration and regard the preference of investors, the securities can be selected and herding effect as the reason for co-movement of stock markets. The information spillover effect assumes that the different open time of stock markets to be the reason for co-movement of stock market.On the basis of above theory, the author choose the opening and closing prices data of CSI300 index and S&P500 from January 4,2007 to June 15,2015 as object of study to make empirical analysis on co-movement of Chinese stock market and America stock market. Amount to 1983 data were obtained after removal of the out-sync trading day data. At first, the raw data were taken the form of logarithm and the daily return rate of indices were divided into the closing return rate and the opening return rate. The unit root test imply that data of daily return rate of two indices and their derivative items is stable. Next the Johansen cointegration test method was used to analyze the relationship between Chinese stock market and American stock market in the long run. The empirical results indicate that there is no long tern equilibrium relationship between Chinese stock market and American stock market. Thereafter the Granger test showed that the American stock market has one-way impact on the Chinese stock market, while Chinese stock market hardly has any impact on the American stock market. And then a DCC-GARCH model was built to analyze the dynamic correlation of Chinese and American stock market. By empirical test I founded that a certain dynamic correlation existed between Chinese and American stock market, but the correlation was still at a low level. Empirical results of divided parts of daily return of indices showed there is a great dynamic correlation between the closing return rate of S&P500 index and the opening return rate of CSI300 index, which indicated that the information in American stock market would significantly spill over to Chinese stock market, but the information in Chinese stock market would not spill over to American stock market. In the end of this paper, the author summarized the conclusion of this study and made some suggestion on improve the market mechanism to enhance transparency and enrich financial instruments to hedge risk for further improve the efficiency of Chinese stock market.