Regulation Change and Volatility Spillovers: Evidence from China's Stock Markets

Abstract

This paper investigates the structural changes of volatility spillovers between Chinese A-share and B-share markets induced by a regulation change on February 19, 2001, that allowed Chinese domestic investors to trade in the B-share market. The empirical results of the study, using high-frequency intraday data collected from a sample of seventy-eight firms issuing both A-shares and B-shares and employing a bivariate generalized autoregressive conditional heteroskedasticity (GARCH) model, show that after the regulation change, the volatility in A-shares increases the volatility in B-shares, thus increasing the risk of the whole market, whereas the latter reduces the former, thus reducing the risk of the whole market. A further investigation of the determinants influencing these structural changes shows that the following factors can encourage structural changes that reduce overall market risk: government ownership, institutional ownership, firm size, B-share proportion, and market-to-book ratio. Conversely, the following factors can encourage structural changes that increase overall market risk: dual roles of chief executive officer and chairman and the joint effect of firm size and B-share proportion.