DYNAMIC VOLATILITY SPILLOVERS ACROSS THE EXTENDED GREATER CHINA REGION STOCK MARKETS

Abstract

The study investigates volatility transmissions of major financial market indices found in the Extended Greater China Region (EGCR): the Shanghai Stock Exchange Index (SSEI), the Hang Seng Stock Exchange Index (HSEI), the Taiwan Stock Exchange Capitalization Weighted Stock Index (TAIEX), and the Singapore Stock Exchange Index (STI). This paper utilizes three Multivariate Generalized Autoregressive Conditional Heteroskedasticity (MGARCH) models to determine variance persistence in the EGCR. The MGARCH approach applies the Baba–Engle–Kraft–Kroner (BEKK) model and the dynamic conditional correlation (DCC) and constant conditional correlation (CCC) estimations. This research found that the SSEI consistently has the highest volatility among the stock markets in the EGCR, and this can be explained by the poor acknowledgment of minority shareholders’ rights or having a weak so-called “common-law” regime. The paper also found that volatilities in the EGCR are determined strongly by their own lagged values more than the product of lagged cross-products of shocks. This means that financial market movements in the EGCR are still strongly influenced by internal factors more than the external influences. The paper contributes to the literature by understanding the potential changes in volatility relationships in low- and high-volatility regimes of the EGCR, which can be used to improve risk management practices and asset allocation techniques in the region.