Correlations and volatility spillovers between China and Southeast Asian stock markets
Yi Zhong and
The Quarterly Review of Economics and Finance, 2021, vol. 81, issue C, 57-69
In this paper, we use multivariate GARCH models to illustrate dynamic conditional correlations and the volatility spillovers between Chinese and five Southeast Asian stock markets comprising of Singapore, Thailand, Indonesia, Malaysia and Philippines. Four multivariate GARCH models including BEKK, diagonal, constant conditional correlation, and dynamic conditional correlation are compared and contrasted. It is found that the DCC-GARCH model fits the data best and this model is subsequently used to construct hedge ratios and optimal portfolio weights. The empirical results reveal that the dynamic conditional correlation between China and five Southeast Asian stock markets is positive on the whole, and get to its peak during the Asian financial crisis, U.S. subprime crisis and stock market crash in 2015. In addition, we can estimate dynamic hedge ratios by using conditional volatilities from the DCC model. A $1 long position in Shanghai composite index (SHPI) can be hedged for 27.32 cents with a short position in the FTSE Straits Times Index (SSPI) futures markets. Finally, we construct optimal two stock asset portfolios by using conditional variances and co-variances from the DCC model. Investors could construct stock portfolios of China and Southeast Asian countries to hedge stock investments, which can effectively reduce investment risks.
Keywords: Southeast Asian; Stock market; Multivariate GARCH; Volatility spillover; Hedging (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:81:y:2021:i:c:p:57-69
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