Dynamic linkage between the Chinese and global stock markets: A normal mixture approach

Li Wan, Liyan Han, Yang Xu and Roman Matousek

Emerging Markets Review, 2021, vol. 49, issue C

Abstract: The paper provides an empirical framework for analyzing the dynamic linkage between Chinese and thirty major stock markets globally. In doing so, we employ the bivariate normal mixture model, a weighted average of two normal distributions that can reveal both the degree and structure of dependence between markets. We show that the level of dependence strengthened since 2004 in general, whereas the contagion effects spread heterogeneously during the global financial crisis. We also examine potential factors that affect the stability of the linkage by capturing regime switching behavior. The results suggest that business cycle synchrony plays a significant role in increasing the instability of dependence between the Chinese and global stock markets, while the impact of asynchrony is negligible. Additionally, we observe increased dependence and unstable structure, associated with the implementation of China's capital market liberalization policies and RMB exchange rate reform.

Keywords: Chinese stock market; Global stock markets; Normal mixture model; Business cycle synchrony; Financial openness; Exchange rate reform (search for similar items in EconPapers)
JEL-codes: F44 F65 G15 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ememar:v:49:y:2021:i:c:s156601411830298x

DOI: 10.1016/j.ememar.2020.100764

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