China Vs Japan Hong Kong India US Taiwan

Pacific-Basin Finance Journal 20 (2012) 247–270

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Pacific-Basin Finance Journal journal homepage: www.elsevier.com/locate/pacfin

Volatility spillovers between the Chinese and world equity markets
Xiangyi Zhou a,⁎, Weijin Zhang a, Jie Zhang b a b

Jinhe Center for Economic Research, Xi 'an Jiaotong University, PR China
Department of Economics, Texas A&M University, United States

a r t i c l e

i n f o

Article history:
Received 23 February 2011
Accepted 2 August 2011
Available online 16 September 2011
Keywords:
China
World equity markets
Vector autoregression
Variance decomposition
Spillover index
Financial crisis
JEL classification:
G15
F36

a b s t r a c t
We propose measures of the directional volatility spillovers between the Chinese and world equity markets based on Diebold and Yilmaz 's
(2011b) forecast-error variance decompositions in a generalized vector autoregressive framework. It was found that the US market had dominant volatility impacts on other markets during the subprime mortgage crisis. The other markets were also very volatile, and driven by bad news, their massive volatilities were transmitted back to the US market. The volatility of the Chinese market has had a significantly positive impact on other markets since 2005. The volatility interactions among the markets of China, Hong Kong, and
Taiwan were more prominent than those among the Chinese,
Western, and other Asian markets were. The major correction of the
Chinese stock market between February and July 2007 significantly contributed to the volatility surges of other markets. Owing to the restrictions on foreign investment, the Chinese stock market was not considerably affected in terms of market volatility during the subprime mortgage crisis.
© 2011 Elsevier B.V. All rights reserved.

1. Introduction
As globalization and financial liberalization are enabling international financial markets to become more correlated and connected than ever before,

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