The Dynamics of Volatility Connectedness and Implication for Market Integration in China's Financial Markets

23 Pages Posted: 13 Jun 2018

See all articles by Kim Hiang Liow

Kim Hiang Liow

National University of Singapore (NUS) - Department of Real Estate

Xiaoxia Zhou

Shanghai University of Finance and Economics-School of Finance

Date Written: May 20, 2018

Abstract

We study volatility connectedness effects and market integration among the China’s five financial markets: stock, real estate, bond, commodity futures and foreign exchange (currency). We use several measures of market connectedness to assess the degree of volatility connectivity shocks across China’s five financial markets and its implication for market integration via linear and nonlinear Granger causality analysis. We also conduct impulse responses function analysis to obtain fresh insights into the transmitting mechanism of the financial market movements within the Chinese economy during the China stock market crash period. Our results indicate that the five China’s major financial markets are not strongly integrated. Over the full study period, the commodity futures market is the largest net “sender” of volatility connectedness shocks to other markets, followed by the stock market and the FX market. In contrast, the bond and real estate markets are the net “recipients” of volatility connectedness shocks. The five China’s financial markets influenced and has been influenced though their non-linear causal linkages between the respective net total directional connectedness indices, implying that the markets examined in this study are relatively inefficient. Finally, during the China stock market crash period, stock and real estate reacted with similar patterns and larger positive or negative responses to shocks. In contrast, bond and commodity futures appear to have milder levels of shocks response and fluctuate with less magnitudes over time.

Keywords: Financial Markets, Public Real Estate, Volatility Connectedness, Granger Causality Test, Market Integration Generalized Impulse Response Functions

JEL Classification: F3, G15

Suggested Citation

Liow, Kim Hiang and Zhou, Xiaoxia, The Dynamics of Volatility Connectedness and Implication for Market Integration in China's Financial Markets (May 20, 2018). Available at SSRN: https://ssrn.com/abstract=3186356 or http://dx.doi.org/10.2139/ssrn.3186356

Kim Hiang Liow (Contact Author)

National University of Singapore (NUS) - Department of Real Estate ( email )

4 Architecture Drive
Singapore 117566
Singapore
65-8743420 (Phone)
65-7748684 (Fax)

Xiaoxia Zhou

Shanghai University of Finance and Economics-School of Finance ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

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