Regime-dependent volatility spillover asymmetry in Shanghai and Hong Kong stock markets with forecasting and portfolio inferences

Wensheng Lin and Xuewu Wang

Economic Modelling, 2025, vol. 152, issue C

Abstract: This study examines asymmetric volatility spillovers between Shanghai and Hong Kong equity markets using a novel regime-dependent spillover index within a Markov-switching VAR framework. High-frequency data analysis reveals: (1) Post-2014 Stock Connect amplifies spillovers with pronounced asymmetry, particularly adverse shock dominance during turbulence, establishing Shanghai as the primary negative volatility transmitter; (2) While regime-switching asymmetric models enhance forecasting accuracy, portfolio strategies under conventional BEKK and aBEKK models are constrained by post-Program integration. Our regime-dependent (RD) model significantly improves portfolio efficiency while reducing rebalancing costs. Crucially, by leveraging regimes of realized volatility derived from intraday 5-min data, the RD approach provides policymakers and investors with superior tools for mitigating cross-market risk transmission during financial liberalization. Findings demonstrate that accounting for regime shifts and asymmetry is essential for improvement of volatility forecast and effective risk management in emerging markets.

Keywords: Volatility; Causality instability: regime switching; Asymmetry; Forecast; Portfolio (search for similar items in EconPapers)
JEL-codes: C53 G11 G12 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:152:y:2025:i:c:s0264999325002639

DOI: 10.1016/j.econmod.2025.107268

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