Volatility spillover from the Chinese stock market to E7 and G7 stock markets

Abstract

Purpose The purpose of this paper is to examine volatility spillover from the Chinese stock market to E7 and G7 stock markets. Using the estimated results, the authors also analyze the optimal weights and optimal hedge ratios for the portfolios including stocks from E7 and G7 countries. Design/methodology/approach The authors employed generalized vector autoregressive-generalized autoregressive conditional heteroskedasticity approach, developed by Ling and McAleer (2003), in order to analyze daily data on the national stock indices. Considering the late establishment of some E7 stock markets, the sampling covers the period from 1995 through 2015. Findings The findings indicate significant volatility spillover from the Chinese stock market to E7 and G7 stock markets. In particular, the Chinese stocks highly co-move with the stocks of countries within a same geographical region. While the highest volatility spillover occurs between China and India among E7 countries, the highest volatility spillover occurs between China and Japan among G7 countries. Furthermore, the examination of optimal weights and hedge ratios suggest that investors should hold more stocks from G7 countries than E7 countries for their portfolios. Originality/value To the best of the authors’ knowledge, this is the first study which investigates the volatility spillover in the stock markets of G7 and E7 countries. Moreover, the current study contributes particularly to the existing limited literature on the Chinese stock market. Since the Chinese stock market is not fully integrated to other markets and it is subject to intense government interventions, there is a widely accepted belief that the contagion effects from the Chinese stock market to other stock markets are not influential. This view discourages and limits the prospect studies. However, the findings of this paper refute this view and indicate significant interaction among the Chinese stock market and E7 and G7 stock markets.

Stock Market Synchronization: The Role of Geopolitical Risk

“…We instead observe that the degree of synchronization between these markets responds positively to geopolitical risk at a higher quantile of GPR [0.65-0.9] and at a middle quantile of synchronization [0.4]. Our findings are consistent with those of Kirkulak Uludag and Khurshid (2019), who document that volatility spillovers between China and the US are more profound than those between China and Russia. Although Balcilar et al (2018) argue that Russia and China are more reactive to geopolitical risks than other BRICS, their stock markets' co-movement remain less responsive to external geopolitical risk due to their strategic relationship.…”

Stock market volatility: a systematic review

“…Investors can effectively benefit from diversification only if the portfolio comprises stock indices with low interdependence levels. Several empirical studies have also found significant evidence of volatility spillover between major stock indices (Abbas et al , 2013; Baele, 2005; Hamao et al , 1990; Ng, 2000; Uludag and Khurshid, 2019). Also, many studies conclude that the linkages between global stock indices increased sharply due to global financial shocks, resulting in a contagion situation (Arshanapalli and Doukas, 1993; Jawadi et al , 2015; Vo and Ellis, 2018).…”