International linkages of the Chinese stock exchanges: a multivariate GARCH analysis

Abstract

This paper examines the linkages between the two emerging stock exchanges in mainland China and the established markets in Hong Kong and in the US by a multivariate GARCH approach. We use a four-variable asymmetric GARCH in the line of the BEKK model proposed by Engle and Kroner (1995 Engle, R and Kroner, K. 1995. Multivariate simultaneous generalised ARCH. Econometric theory, 11: 122–50. [Crossref], [Web of Science ®] , [Google Scholar]) to account for the regularities documented in the share price indices and test for the transmission of returns and volatility across the markets. While we do not find any evidence of a direct linkage between the stock exchanges in mainland China and the US market, we find evidence of uni-directional volatility spillovers from the stock exchange in Hong Kong to those in Shanghai and Shenzhen. However, the magnitude of the volatility linkages between the mainland and Hong Kong is small, indicating a weak integration of the Chinese stock exchanges with the regional developed market. The implication of the weak integration is that overseas investors will benefit from the reduction of diversifiable risk, and thus total portfolio risk, by adding the mainland Chinese stocks to their investment portfolio.