Study on the Extreme Risk Spillover between China and World Stock Market after China’s Share Structure Reform

DOI: 10.4236/jfrm.2014.32006   PDF   HTML   XML   2,764 Downloads   4,256 Views   Citations


With the rising importance of China’s role in the world economy, the Chinese economic fluctuation has become a more and more significant factor that influences the world economy. Therefore, it is an interesting issue for all circles as well as academicians that whether the real economic inter-connection leads to volatility spillover between China’s and international stock markets. In this paper, CGARCH (Combine Generalized Auto Regressive Conditional Heteroskedasticity) model and Granger causality test are applied to examine the relationship between China’s A share index and world’s major indices with respect to the extreme risk spillover effect. The results show that the extreme risk of A share market’s long-run volatility component has strong risk spillover effect on foreign markets, while the short term volatility is vulnerable to the risks from overseas. Since long-run volatility component is consistent with real economic cycle, our results support that China’s economy has deep impact on world economy.

Share and Cite:

Wang, L. (2014) Study on the Extreme Risk Spillover between China and World Stock Market after China’s Share Structure Reform. Journal of Financial Risk Management, 3, 50-56. doi: 10.4236/jfrm.2014.32006.

Conflicts of Interest

The authors declare no conflicts of interest.


[1] Bailey, W. (1994). Risk and Return on China New Stock Market: Some Preliminary Evidence. Pacific Basin Finance, 2, 243-260.
[2] Johnson, R., Sun, M., & Soenen, L. (1994). The Shenzhen Stock Exchange: An Assessment of the Risk and Return. Asian Business, 10, 1-16.
[3] Huang, B. N., Yang, C. W., & Hu, J. W. S. (2000). Causality and Cointegration of Stock Markets Among the United States, Japan, and the South China Growth Triangle. International Review of Financial Analysis, 9, 281-297.
[4] Hong, Y. M., Cheng, S. W., Liu, Y. H., & Wang, S. Y.(2004). The Extreme Risk Spillover between China and World Stock Market. China Economic Quarterly, 3, 703-726.
[5] Hamao, Y., Masulis, R. W., & Ng, V. (1990). Correlations in Price Changes and Volatility across International Stock Markets. Review of Financial Studies, 3, 281-307.
[6] Lin, W., Engle, R. F., & Ito, T. (1994). Do Bulls and Bears Move across Borders? International Transmission of Stock Returns and Volatility. Review of Financial Studies, 7, 507-538.
[7] King, M., Sentana, E., & Wadhwani, S. (1994). Volatility and Links between National Stock Markets. Econometrica, 62, 901-933.
[8] Engle, R. F., & Lee, G. A. (1999). Permanent and Transitory Model of Stock Return Volatility. In R. Engle, & H. White (Eds.), Cointegration, Causality, and Forecasting: A Festschrift in Honor of Clive W. J. Granger (pp. 475-497). Oxford: Oxford University Press.
[9] Chan, K. C., Karolyi, G. A., & Stulz, R. M. (1992). Global Financial Market and the Risk Premium on US Equity. Journal of Financial Economic, 32, 137-1671.
[10] Wu, S. N., & Pan, Y. (2005). The Study on the Cointegration and Causality between Hong Kong and China Stock Market. Chinese Journal of Management, 2, 190-199.
[11] Engle, R., & Rosenberg, J. (2000). Testing the Volatility Term Structure using Option Hedging Criteria. Journal of Derivatives, 8,10-28.
[12] Alizadeh, S., Brandt, M., & Diebold, F. (2002). Range-Based Estimation of Stochastic Volatility Models. Journal of Finance, 57, 1047-1091.
[13] Bollerslev, T., & Zhou, H. (2002). Estimating Stochastic Volatility Diffusion using Conditional Moments of Integrated Volatility. Journal of Econometrics, 109, 33-65.
[14] Chernov, M., Gallant, R., Ghysels, E., & Tauchen, G. (2003). Alternative Models for Stock Price Dynamics. Journal of Econometrics, 116, 225-257.
[15] Chacko, G., & Viceira, L. (2003). Spectral GMM Estimation of Continuous-Time Processes. Journal of Econometrics, 116, 259-292.
[16] Malkiel, B. (1979). The Capital Formation Problem in the United States. Journal of Finance, 34, 291-306.
[17] Adrian, T., & Rosenberg, J. (2008). Stock Returns and Volatility: Pricing the Long-Run and Short-Run Components of Market Risk. Journal of Finance, 6, 2997-3030.
[18] Granger, C. W. J. (1969). Investigating Causal Relations by Econometric Models and Cross-Spectral Methods. Econometrica, 37, 424-438.
[19] Granger, C.W.J. (1980). Testing for Causality: A Personal View. Journal of Economic Dynamics and Control, 2, 329-352.

comments powered by Disqus

Copyright © 2020 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.