The Dynamic Relationship of China's Stock Markets: A VAR-MGARCH Model

Abstract

This paper tries to study the integration and spillover effect between Shanghai Stock Exchange and New York Stock Exchange. At first, similar to Chow and Lawler (2003), the weekly return and volatility of Shanghai and New York Stock Exchange composite indices are analyzed with vector auto regression, stationarity test, and Granger causality test in order to study the co-movement between these two markets. Then considering the existence of ARCH effect, multivariate volatility models including MGARCH and MSV models are used to characterize the dynamics of volatilities. The empirical results show that to some extent there exists spillover effect. In order to test whether the integration between Shanghai and New York stock market is affected by some great economic events, we also study the integration with sub sample data instead of full sample data.