Volatility connectedness and market dependence across major financial markets in China economy

Kim Hiang Liow; Jeongseop Song; Xiaoxia Zhou; Kim Hiang Liow; Jeongseop Song; Xiaoxia Zhou

doi:10.3934/QFE.2021018

Quantitative Finance and Economics

2021, Volume 5, Issue 3: 397-420. doi: 10.3934/QFE.2021018

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Research article

Volatility connectedness and market dependence across major financial markets in China economy

1.
Department of Real Estate, National University of Singapore, Singapore 117566, Singapore
2.
School of Finance, Shanghai University of Finance and Economics, Shanghai, China

Received: 03 February 2021 Accepted: 24 May 2021 Published: 26 May 2021
JEL Codes: G01, G10, G12, G15

With the increasing openness of the China economy, the goal of this paper is to examine volatility connectedness and spillover transmissions across markets for stock, public real estate, bond, commodity futures, and foreign exchange within the China economy. Over the full study period, we find that the five China's financial markets are not strongly volatility connected. The bond market is the predominant market of spillover transmission, whereas the commodity futures market is the top net recipient of volatility connectedness shocks. The role of spillover transmission increased during the three financial crisis periods studied. Additionally, the five markets display some degree of nonlinear causal dependence. During the Chinese stock market crash, the stock and public real estate reacted with similar patterns and larger positive or negative responses to shocks, whereas bonds and commodity futures have milder shocks response. Our findings have important implications for portfolio investors in asset diversification and policymakers in their domestic macroprudential policy coordination and control.
- volatility connectedness,
- spillover transmissions nonlinear causal dependence,
- market dependence,
- impulse response functions,
- China economy
Citation: Kim Hiang Liow, Jeongseop Song, Xiaoxia Zhou. Volatility connectedness and market dependence across major financial markets in China economy[J]. Quantitative Finance and Economics, 2021, 5(3): 397-420. doi: 10.3934/QFE.2021018

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Abstract

With the increasing openness of the China economy, the goal of this paper is to examine volatility connectedness and spillover transmissions across markets for stock, public real estate, bond, commodity futures, and foreign exchange within the China economy. Over the full study period, we find that the five China's financial markets are not strongly volatility connected. The bond market is the predominant market of spillover transmission, whereas the commodity futures market is the top net recipient of volatility connectedness shocks. The role of spillover transmission increased during the three financial crisis periods studied. Additionally, the five markets display some degree of nonlinear causal dependence. During the Chinese stock market crash, the stock and public real estate reacted with similar patterns and larger positive or negative responses to shocks, whereas bonds and commodity futures have milder shocks response. Our findings have important implications for portfolio investors in asset diversification and policymakers in their domestic macroprudential policy coordination and control.

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