China Center for Economic Research Working Paper Series No. E2006007
This paper explores the linkages between the different stock markets in the Greater China region. Cointegration tests indicate that the three markets are not cointegrated. A vector-autoregressive multivariate conditional volatility model that accounts for asymmetric volatility effects is used to model the mean and volatility processes of the different stock markets. The empirical findings indicate spillover effects in both mean and variance between the markets. Both China and Hong Kong are effected by mean spillover effects from Taiwan, while Hong Kong and Taiwan show signs of a feedback relationship in their volatility processes. The later markets also show clear signs of asymmetric volatility effects, while China's market seems to follow a symmetric volatility path. Overall, the Mainland China market is much less interdependent with the other two markets, whereas Taiwan and Hong Kong show clear bidirectional spillover effects. Furthermore, the volatility persistence is strong in all three markets, and especially so in the Mainland China stock market, where the half-life of innovations in the volatility process is close to 40 periods.