Stock Market Interactions Driven by Large Declines

Yong Ma, Weiguo Zhang, Zhengjun Zhang and Weidong Xu

Emerging Markets Finance and Trade, 2014, vol. 50, issue S5, 159-171

Abstract: This paper seeks to explore the relationship among the large declines in China’s stock market and stock markets in the United States, the United Kingdom, Japan, and Hong Kong, and to forecast future large declines in China’s stock market. We apply mutually exciting marked Hawkes processes—where the occurrences of large declines are regarded as events whose magnitudes follow generalized Pareto distributions—to study the interaction between the different stock markets. We find that these interactions are asymmetric. The occurrences of large declines in the Chinese stock market will stimulate declines in the United States and the United Kingdom, and especially in Japan’s and Hong Kong’s stock markets. However, only large declines in Hong Kong’s market have a substantial influence on the occurrence of big declines in China’s market. Finally, we try to predict the time of occurrence of the next major decline in China’s stock market using information from our empirical results.

Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:mes:emfitr:v:50:y:2014:i:s5:p:159-171

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DOI: 10.2753/REE1540-496X5005S511

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