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Research on the Correlations of China and the United States Stock Markets in the Opening up Process of China Capital Market

Author Cao
Tutor WuQiu
School Nanjing University of Aeronautics and Astronautics
Course Finance
Keywords correlations of stock markets index return VAR model DCC-MVGARCH model
Type Master's thesis
Year 2013
Downloads 7
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Since the deepening of global economic and financial market integration, correlations betweeninternational stock markets are enhanced. The rates of return and volatilities of different countries’stock markets might interact with each other. In the process of gradual opening up of China capitalmarket, China stock market becomes increasingly closer with external stock markets. As a result, theinternationalization of China stock market will be inevitable trend of its development. In order toavoid investment risk from relevant international markets, promote steady development of Chinastock market, a correlation study of the rate of return and volatility between China capital market andthe world’s mature capital markets is necessary and important, particularly the correlation studybetween China and U.S. stock markets.Based on the daily return of Shanghai Composite Index, Hang Seng Index and S&P500fromDecember11,2001to December30,2012and set some key events from the open up process of Chinacapital market as dividing points, this study is divided into six stages. Under theoretical analysis andpractical analysis of stock market, this study applied VAR model, DCC-MVGARCH model as well asGranger causality test, impulse response function, to research the correlation coefficient of variancedecomposition and dynamic conditions at different stages among mainland China, Hong Kong and theUnited States. The result shows that the yields between three stock markets and volatilities in differentstages have different strength and weakness during the open up process of China capital market.Besides, in general, with the gradual reform and improvement of China capital market, as well asopening up of China capital market, the correlations among the mainland China, Hong Kong and U.S.stock market are becoming more and more significant. However, the movements of these threemarkets are not completely consistence and the process of internationalization of China stock marketis still facing many challenges.To conclude, this study discusses and analyses reasons of the differences of correlations amongdifferent stock markets, including the reason of correlation enhanced during the open up process,inconsistence of three capital markets after short mechanism introduced and overall weak correlationof three stock markets in the entire study interval. At last, in order to accelerating the process ofinternationalization of China capital market, promoting the integration of China stock market andinternational stock market, based on promoting the healthy development of china stock market andpreventing over movement of it, many suggestions are recommended.

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