Modelling cross-market linkages between global markets and China’s A-, B- and H-shares

Abstract

One of the biggest challenges in quantifying joint risk and forming effective policies in financial management and investment strategies is to fully understand the characteristics of market associations in low and high volatility periods. Market interdependence, therefore, is a hot topic that has received interest from academics and industry experts, especially since the Asian Financial Crisis in 1997. China, being the world’s second-largest economy, has been the centre of many studies investigating stock market dependencies. While China has three major share types, namely A-, B- and H-shares, with different market players, market characteristics and operating efficiency, the number of studies on each of these share types remains conservative in comparison to the vast literature on the financial modelling of market interdependencies. Given the need for a more comprehensive understanding of the influence between these share types and other global markets, especially during market turbulences, this thesis examines the cross-market linkages between A-, B- and H-shares in China and several major emerging and advanced markets from 2002 to 2017, which is divided into two non-crisis periods and two crisis periods. This thesis assesses market integration among 17 markets, including asymmetries and leverage effect in the marginal distributions, volatility spillover and tail dependence. The thesis aims to: 1) investigate the univariate asymmetries and leverage effect in the distributional volatility of each time series and to detect volatility spillover between China and other studied markets; 2) assess the dynamic multivariate dependence between China and other studied markets; 3) evaluate the bivariate dependence structure for each of China’s markets and other studied markets using seven different copula functions; and 4) study the multivariate joint tail dependence structure of all studied markets using vine copulas. There are various findings from the thesis. Many advanced and emerging markets experienced leverage effect and asymmetries in volatility. China’s markets were much more prone to local shocks than external shocks and in many cases, there is evidence that China’s markets diverged from the global trends especially during the crisis periods. Besides, segmentation between China’s markets and the United States is clearly evident. In addition, regional dependence is stronger than intra-regional dependence. The thesis also found the existence of contagion effect between each of China’s markets and various markets in the sample in the Global Financial Crisis. Finally, heterogeneity was found for A-, B- and H-shares in various aspects, from distributional asymmetries to joint behaviour in both crisis and non-crisis periods. A novel aspect of this thesis is that it closes the gap in the literature of market linkages for A-, B- and H-shares with other global markets by assessing volatility spillover, time-varying co-movement, and tail dependence among the studied markets. This thesis provides various implications in both theoretical and empirical contexts in many areas including measuring joint risk at the tails, constructing an optimal portfolio, hedging, and managing financial exposures and contagious volatility from other markets. The thesis provides some recommendations and suggestions regarding the policies implemented in China