Dynamic linkages between China and US equity markets under two recent financial crises

Abstract: This paper explores and compares the effects of two financial crises (the 1997 Asian Financial Crisis and the 2007-2010 Subprime Financial Crisis) on short-run and long-run linkages between equity markets in China (mainland and Hong Kong) and US. In particular, we not only investigate the return causality relationships by applying vector autoregressive (VAR) analysis, but we also examine the volatility spillover effects by using a multivariate GARCH - BEKK model. The empirical findings indicate that, although the financial markets in mainland China have gradually opened and become more liberalized, the mainland stock indices are not cointegrated with US and Hong Kong in the long run. However, in the short run, the spillover effects on return and volatility exist between different groups of equity markets. Overall, compared to the Asian Crisis, the dynamic interactions between China and US have increased during the Subprime Crisis.