Empirical Analysis of Dynamic Linkages between China and International Stock Markets

Abstract

This paper investigates the dynamic conditional correlations (DCC) of stock returns between China and international markets. Statistics suggest that stock-return correlations across markets are time-varying, displaying a structural change triggered by an upward shift in China’s adoption of financial liberalization and the occurrence of the worldwide financial crisis. The dynamic correlations are closely tied to geographic location: the highest correlation is with Hong Kong, followed by Taiwan and Korea; the correlations with Europe and the US are low. The DCC series are negatively associated with the relative P/E ratios and are positively associated with the risk from the US market.