Stock market integration and financial crises: evidence from Chinese sector portfolios

Li, Hong; Daly, Vincent

Abstract

This paper assesses China’s stock market integration with the global market during 1997-2013 and the impact of financial crises on the extent of integration within an augmented CAPM framework. We obtain time-varying global and national systematic risks for ten Chinese sectors from a state-space representation and investigate how these risks are priced in crisis and non-crisis periods, respectively, by employing a dummy variable approach and the Markov two-state regime-switching technique. We find evidence of positive exposures to both the global and national systematic risks in the majority of the ten sectors under study in the period excluding the recent global financial crisis, pointing to a conclusion of partial integration. During the global financial crisis, international influence on China’s asset pricing strengthens, leading to complete market integration in half of the sectors under study. Complete integration is indeed a dominant feature of the global financial crisis as it is not evident in the high-volatility crisis periods. Our results suggest an opportunity of international diversification by selective inclusion of Chinese assets.

Citation

Li, H., & Daly, V. (2014). Stock market integration and financial crises: evidence from Chinese sector portfolios

• Acceptance Date: May 1, 2017
• Online Publication Date: Nov 1, 2017
• Publication Date: Jan 1, 2014
• Deposit Date: Mar 12, 2019
• Publicly Available Date: Mar 12, 2019
• Print ISSN: 1923-7529
• Electronic ISSN: 1923-8401
• Publisher: Better Advances Press
• Peer Reviewed: Peer Reviewed
• Volume: 10
• Issue: 4
• Pages: 33-48
• Keywords: Asset pricing; Financial crisis; Regime-switching; Stock market integration; Time-varying systematic risk
• Public URL: https://nottingham-repository.worktribe.com/output/1629932
• Publisher URL: https://www.nottingham.ac.uk/iaps/documents/cpi/working-papers/working-paper14.pdf
• Related Public URLs: https://www.nottingham.ac.uk/iaps/cpi/archive/working-papers/index.aspx
• Additional Information: School of Contemporary Chinese Studies. China Policy Institute. Working paper series. Working paper No. 14