Stock Market Integration and Financial Crises: Evidence from Chinese Sectoral Portfolios
Journal Title: Review of Economics & Finance - Year 2017, Vol 10, Issue 4
Abstract
This paper assesses China's integration with the global stock market during crisis and non-crisis periods within a two-beta Capital Asset Pricing Model framework. We obtain timevarying global and national systematic risks for ten Chinese sectors from a state-space representation and investigate how these risks are priced within and without crisis. Crisis is modelled by, firstly, a dummy variable approach and, secondly, the Markov regime-switching technique. Consistent with the literature, the degree of integration with the global market is found to be strengthened in crises. Complete integration is, however, only evident in the recent financial crisis and then not in all sectors. In other high-volatility episodes, partial integration is more evident, suggesting the opportunity for international risk diversification into China even in crises. Particular to the Chinese context, the weak integration of some sectors that appear to show financial openness may be because public sector equity holdings leave those sectors exposed to national systematic risk through a political channel.
Authors and Affiliations
Hong LI, Vincent Daly
Keywords
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